Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

Central banks

Last week’s FOMC meeting did little to sway the fixed income markets, largely because the much-anticipated May CPI release had already set the tone earlier in the day. The Federal Reserve adjusted its interest rate outlook, now forecasting just one rate cut in 2024, down from three previously anticipated, with more cuts expected in 2025. This adjustment indicates a slower path to easing than many had hoped for. The federal funds rate remains steady at 5.25%, as the Fed calls for more concrete evidence before any further rate reductions. Notably, the Fed's long-term interest rate projections were also revised, suggesting that higher rates could linger longer than initially expected. Despite this, the neutral Fed Funds rate was adjusted upwards to 2.75% from 2.50%, underscoring a still restrictive policy stance over the long term. Market reactions were somewhat defiant, with expectations not aligning fully with the Fed's more conservative projections; the market is pricing in rate cuts for November and December, challenging the Fed’s less aggressive stance. In Europe, the conversation shifted away from inflation for a brief moment due to the electoral upheavals, bringing a different kind of volatility to the markets. The European Central Bank, through public communications, sought to reassure markets amidst the French electoral tensions, with ECB President Christine Lagarde downplaying the potential market disruptions. Lagarde continues to express cautious optimism about the Eurozone reaching its disinflation targets, although she acknowledges the road will be bumpy with potential setbacks. She remains wary of committing to further rate cuts, highlighting ongoing uncertainties including wage dynamics and geopolitical developments. Meanwhile, in Japan, the Bank of Japan held its rates steady but announced a cut to its bond-buying program set for after their next meeting in July. Governor Kazuo Ueda indicated that this reduction would be substantial, marking a significant step toward normalizing Japan’s monetary policy. This move, while maintaining the key interest rate unchanged, signals a shift towards reducing the BoJ's market presence, a change that has introduced some uncertainty and disappointment among bond market participants.


The past week was tumultuous for European credit markets, marking the worst performance of the year. This downturn was sparked by French President Macron's unexpected call for legislative elections, casting a shadow of uncertainty over the region. The Euro Stoxx 50 index mirrored this sentiment, dropping by over 4%, while European credit spreads widened significantly. High Yield spreads surged by 45 bps to 380bps, and Investment Grade spreads expanded by 15 bps to 122bps. Despite these challenges, the iShares Core Euro IG Corporate Bond ETF managed a gain of 0.6%, buoyed by the robust performance in government bonds. Conversely, the iShares Euro HY Corporate Bond ETF saw a decline of 0.5% over the week. The most impacted were the higher beta credits, particularly CoCo banking bonds and hybrid bonds, which suffered considerably. Notably, the WisdomTree AT1 CoCo Bond ETF and the Invesco Euro Corporate Hybrid ETF recorded losses of 0.7% and 0.6%, respectively. French banks felt the strain acutely; for example, an AT1 bond from Société Générale plummeted by over 4 points, reflecting the dramatic 15% fall in its equity. In the United States, credit markets also experienced some pressure, though to a lesser extent. US credit spreads widened modestly in sympathy with European markets—Investment Grade spreads widened by 5 basis points, and High Yield spreads by 15 basis points. Despite this, the Vanguard USD Corporate Bond ETF posted a gain of 0.9% last week, thanks to the positive performance of US government bonds. The iShares Broad USD High Yield Corporate Bond ETF also saw an increase, albeit a smaller one, of 0.2%. This relative stability in the U.S. contrasts sharply with the volatility seen in Europe, underscoring the diverse dynamics at play in global credit markets.


Last week, US government bonds saw notable gains across various maturities. The iShares 3-7 Year Treasury Bond ETF rose by 1.15%, buoyed by weaker macroeconomic indicators such as initial jobless claims and the University of Michigan Sentiment Index, alongside encouraging developments in inflation metrics like the CPI and PPI. This upswing brought the ETF back into positive territory for the year-to-date (YTD) returns, a status last observed in early February 2024. Conversely, despite a robust weekly advance of nearly 3%, the iShares 10-20 Year Treasury Bond ETF remains in the red YTD, down by 1.3%. Among Treasury indexes, the iShares USD TIPS ETF stands out with a YTD gain of 0.9%, reflecting a relatively stable investment in inflation-protected securities. The 10-year US breakeven rate, which reflects market inflation expectations, dropped significantly by 18 bps, settling just above the lower boundary of a 3.5-year range between approximately 2.10% and 2.50%, despite a 4% rebound in oil prices over the week. The 10-year real rates held steady just above 2%. The overall nominal yield on the 10-year US Treasury bond dropped significantly by 20 bps to 4.22%, marking the lowest weekly close since March. Moreover, the US yield curve (2s10s) deepened its inversion to -49 bps, the most pronounced inversion recorded in 2024. In Europe, the spotlight was on the political arena, particularly the French elections, which significantly influenced bond spreads. The spread between 10-year French and German government bonds widened dramatically to 78 bps, the widest since the Greek sovereign debt crisis. This surge of 30 bps in a single week represents the sharpest increase ever recorded. Despite political concerns, the 10-year French government bond yield saw only a modest rise of 3 bps, ending the week at 3.13%. Conversely, investors flocked to German government bonds, traditionally viewed as a safe haven, pushing the 10-year German yield down nearly 30 bps to 2.36%. Peripheral European government bond yields, including those of Italy, Spain, and Greece, also widened relative to German bonds by about 20 bps. The gap between the 10-year Italian and German yields expanded to 157 bps, the largest since February 2024. Despite these shifts, the iShares EUR Government 3-7Y ETF managed to secure a weekly gain of 0.8%, although it remains down by 0.9% YTD, reflecting ongoing market sensitivities and adjustments in the European bond market.

Emerging market

Last week, Emerging Markets (EM) corporate bonds displayed notable resilience amidst a backdrop of global economic uncertainties and a lack of rate cuts from the Federal Reserve. The iShares Emerging Market Corporate Bonds ETF achieved a 0.6% gain, despite only a modest widening of 4 basis points in EM corporate credit spreads, aligning closely with movements in the US Investment Grade market. Conversely, the iShares Emerging Market Sovereign Bonds ETF outperformed, registering a 0.9% increase due to its higher sensitivity to US interest rates, benefiting from its extended duration. However, EM local currency bonds faced challenges, highlighted by a 0.5% decrease in the JPM EM Currency Index last week, attributed to weak performance across EM currencies. In Asia, both Investment Grade and High Yield credit indices experienced their most significant spread widening since August, with Investment Grade spreads increasing by 10 basis points to 80bps and High Yield spreads expanding by 15 basis points to 420bps. Despite these wider spreads, the overall weekly performance remained positive, supported by strong performances in US government bonds. In Mexico, the peso experienced another challenging week. However, Banxico, the Mexican central bank, has indicated readiness to intervene in cases of extreme market volatility. With nearly $250 billion in reserves, including $219 billion in international reserves and a $30 billion currency hedging program, Governor Victoria Rodríguez assured that the central bank has ample mechanisms for intervention and that decisions will be tailored to market conditions leading up to the policy meeting on June 27. Meanwhile, Mexico's year-over-year inflation rate climbed to 4.69% in May 2024, marking a third consecutive monthly rise. In Brazil, the real has depreciated by 10.4% against the US dollar in 2024, influenced by a combination of high US interest rates, European political unrest, and domestic fiscal challenges. The exchange rate nearing BRL5.39 per dollar raises concerns about potential stop-loss activations, which could exacerbate inflationary pressures. This situation complicates the Central Bank of Brazil's efforts to manage inflation and may necessitate higher market interest rates in response.

Our view on fixed income (June)


For government bonds with maturities of less than 10 years, we turn positive. This position is supported by the presence of high real yields, an anticipated peak in central bank’s tightening, a shift towards disinflation, their relative value when compared to equities, and an improvement in correlations. On the other hand, we exercise caution towards bonds with maturities exceeding 10 years. The presence of an inverted yield curve and negative term premiums diminishes their appeal, especially amidst ongoing interest rate volatility.


Investment Grade
We are more cautious on IG corporate bonds. The sharp tightening in credit spreads, reaching lowest level since 2021, has considerably reduced the margin for safety in credit. Spreads now represent less than 20% in the total yield of an investment grade bond. This “price to perfection” encourages us to be more vigilant in this segment.
High Yield

High Yield (HY) could come under pressure in this uncertain environment. Recession fears, expectations of higher default rates and one of the most aggressive monetary policies are expected to weigh on this segment. The spread of U.S. HY bond narrowed below 300bps, its tightest point since January 2022. This current valuation of U.S. HY spreads implies modest default rates and the absence of inflation slippage, or a near-term recession. We see more value on subordinated debts over High Yield. 

Emerging Markets
We have turned negative on Emerging Marke debt, driven by the strength of the dollar and rising US real yields. EM corporate spreads have reached very tight levels, which considerably reduces the margin of safety. Additionally, there are persistent negative capital flows and an increase in short interest in USD-denominated EM debt, indicating growing market pessimism. However, we still see value in bonds with maturities of up to 4 years and yields exceeding 6.5%.

The Chart of the week

Worst Weekly Performance for French OATs in Over a Decade!


Source: Bloomberg

The spread between the 10-year French and German yields has surged to 78 basis points, the highest level since the Greece sovereign crisis. This week alone, the spread jumped by 30 bps, marking the steepest increase ever recorded. The snap elections in France are causing significant market anxiety. The uncertainty surrounding the French legislative outcomes is high, with numerous scenarios pointing towards a potentially ungovernable France for the next three years until the next presidential elections. French equities experienced their worst week (-6%) since the start of the Ukraine war in March 2022, with French bank stocks particularly hard hit (-15%). Meanwhile, in credit market spreads from senior bond only widened by few basis point while the iTraxx Xover index, which tracks high-yield European companies, spiked by 40 bps.


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