Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

Central banks

In the latest move, the Federal Reserve has pressed the pause button on its rate hike campaign. Although 12 Fed officials anticipate the possibility of one more rate hike by year-end, and 7 foresee no further hikes, the Fed's median projections for 2024 and 2025 suggest expectations for a sustained period of elevated rates. The Fed also maintains its core inflation outlook at 2.6% for 2024. Despite this, there are concerns about the potential downside risks of maintaining low real interest rates for an extended period, as job gains have shown signs of slowing. As a result of this decision, the market has priced in a 50% chance of another rate hike by year-end, with no expectation of a rate cut before the summer of 2024. The Bank of England has similarly chosen to halt its aggressive interest rate hike cycle, keeping the key rate steady at 5.25%. This decision reflects decreasing inflationary pressures and growing concerns about a potential economic downturn. The Bank has signaled its preparedness to respond if inflation fails to decline as anticipated, while maintaining a focus on reducing its balance sheet to ensure future financial stability. Following this meeting, the market is indicating a 50% chance of another rate hike by year-end. In parallel, central banks in Switzerland, Sweden, and Norway have adopted varying monetary policy stances. The Swiss National Bank (SNB) surprised markets by keeping rates unchanged while leaving room for potential future adjustments. Sweden's Riksbank raised rates and hinted at the possibility of more hikes, whereas Norway's central bank increased rates and suggested that a single additional hike might suffice. Both Switzerland and Sweden plan to continue selling foreign currencies to shrink their balance sheets and mitigate the impact of imported inflation. The global tightening cycle appears to be nearing its apex, as central banks assert their commitment to preserving current rate levels or enacting only incremental hikes in the immediate future.


In credit, the distinction between cash and synthetic (CDS) was starkly illustrated this week, driven by the equity selloff triggered by surging bond yields. In the U.S., both CDX IG and HY saw substantial spreads widening by 10 and 18 bps, respectively. However, cash indexes, encompassing both Investment Grade (IG) and High Yield (HY), remained relatively flat throughout the week. In sum, the U.S. IG corporate index and US HY index experienced losses of approximately 0.5% for the week, mainly driven by rates. In Europe, a similar picture emerged, with the CDS market mirroring the equity selloff. The iTraxx Xover index widened by 30 bps to reach 417 bps, while the iTraxx Europe Main index widened by 8 bps to 78 bps. Similar to the U.S., EUR IG and HY spreads remained either flat or slightly increased over the week. Both European IG and HY bonds also exhibited relatively flat performance. Notably, HY companies continued to be active in refinancing efforts, with nearly $5 bn in issuances this week. September HY issuances marked the busiest since May 2023, significantly surpassing the levels seen in September 2022. It's worth highlighting that USD IG bonds have become cheaper compared to EUR IG, particularly in the long-term. The USD IG 10y+ hedged pickup has now surpassed the EUR IG 10y+ pickup for the first time since the second quarter of 2022. This shift is attributed to the evolving dynamics between the Fed and the ECB in their respective monetary policy decisions. The subordinated market displayed resilience this week, achieving positive performance. Earlier this year, it drew attention when Credit Suisse (CS) wrote down all its AT1 bonds during UBS's acquisition of the bank. Now, investors are actively bidding for legal claims linked to CS's AT1 debt in hopes of recovering value. Notably, some HFs has offered to buy these claims at 9.5%, reflecting increased speculation about a potential settlement with Swiss authorities regarding the controversial decision to devalue CS's AT1 bonds.


The US 10-year real yield has surged to its highest level in a decade, reaching 2.12%, a figure not seen since 2008. Similarly, the 5-year real yield has climbed to 2.25%. This sharp increase can be attributed to the Federal Reserve's hawkish stance, which has included upward revisions to its growth forecasts for 2023 and 2024, along with a resolute commitment to maintaining higher rates for an extended duration. This yield uptick has significantly steepened the yield curve (2s10s), with a notable 10 bps increase, primarily driven by an upsurge in the long end. Consequently, 30-year US Treasury yields have surged by nearly 15 bps to 4.55% over the week. In response, the Bloomberg (BB) US Treasuries index recorded a weekly loss of almost 1%, pushing its year-to-date performance to a 1% decline, marking the lowest point of the year. It's essential to note that US Treasuries are now facing the possibility of three consecutive years of losses, which would be unprecedented in the history. Meanwhile, in Europe, despite concerning economic data, European rates have experienced losses, particularly at the long end. The 30-year German yield has surged by approximately 10 bps, and the French 10-year yield reached a high not seen since 2011, standing at 3.29%. Rising real rates have had a cascading effect, impacting equities, credit, and peripheral spreads. The spread between the 10-year Italian and German yields has widened to 185 bps, marking an 8 bps increase over the week, returning to levels last observed in May. In the UK, despite the unexpected decision by the Bank of England to cut Gilt purchases by £100 billion over the next 12 months, which offset the surprise of no rate hike, UK yields have ended the week on a lower note. This performance places the UK among the best performers in fixed income this week, with a gain of over +0.5% throughout the week. Lastly, a potential market disruptor is emerging in the Japanese bond market, as yields have once again risen. The Japan 10-year yield touched 0.75%, a level not witnessed since 2013.

Emerging market

All three key segments ended the week in the red. The poorest performance, at -0.7%, was witnessed in EM sovereign hard currency bonds, mainly due to their heightened duration risk exposure. In local currency, these bonds experienced a 0.6% drop, driven by the continued strength of the US Dollar. The corporate segment, on the other hand, showed relative resilience with a -0.3% decline. This was attributed to another week of credit spread tightening, which narrowed by 6 bps to 303 bps, coming within just 3 bps of its lowest level since 2021. However, it's important to note that this spread tightening didn't fully reflect the outflows observed during the week, particularly in the realm of EM hard currency bonds. In China, real estate bonds halted three consecutive weeks of gains, despite signs of stabilization emerging. Notably, home transaction volumes have been rapidly increasing following the relaxation of home purchase rules. Turning to central bank decisions, Egypt opted to maintain its interest rates unchanged, citing indications of softening inflationary pressures. Meanwhile, the South African Reserve Bank (SARB) held its policy rate steady at 8.25%. In Brazil, the Copom implemented a 50 bps cut in the SELIC rate, now standing at 12.75%, reflecting a sustained trend of disinflation. Over in Turkey, the Central Bank (CBoT) continued its aggressive monetary tightening strategy, raising its key rate by 500 bps to 30%. Interestingly, the currency market displayed a relatively subdued reaction to this move while the 5-year Turkey CDS declining by 10 bps over the week to 382 bps. Lastly, the Bank of Indonesia maintained its policy rate at 5.75%, aligning with expectations. Finally, JPMorgan announced the inclusion of India's government bonds in the GBI-EM index. India is anticipated to represent 10% of the index by the close of March 2025.

Our view on fixed income (September)


We recommend gradually extending duration, as there is an attractive asymmetry in rates, supported by expected moderation in growth and inflation. High real rates and elevated long-term inflation expectations contribute to this favorable outlook. However, we exercise caution given the ongoing reduction of the Fed's balance sheet, which affects liquidity and rate dynamics, and the anticipation of higher supply that could trigger ST shock.

Investment Grade

We favor from 0 to 10 years segments due to the steepness of the credit spread curve which fully offset the inverted U.S. Treasury yield curve. Absolute yields are still offering attractive long term entry point. Focus on high quality corporate bonds that have proven their robustness even if money market funds compete the entire credit spectrum.

High Yield


High yield bonds could come under pressure in this very 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 current valuation of U.S. high yield spreads implies modest default rates and the absence of inflation slippage, or a near-term recession.


In Emerging Market debt, we maintain a vigilant stance due to valuation and potential risk considerations. Higher oil prices and a strong US dollar pose challenges for oil-importing EM nations, especially Asian countries, while some Latin American countries may benefit.

The Chart of the week

Are US Treasuries Headed for a Third Consecutive Year of Negative Performance?

202309_US Treasuries ytd perf-1

Source: Bloomberg

The US Treasury market is witnessing another significant selloff, pushing the 10-year US Treasury yield close to the 4.50% mark. The surge in real rates is remarkable, reaching 2.12% for the 10-year, a level not seen since 2008. While this might appear attractive in real terms compared to historical benchmarks, could we be on the brink of a third consecutive year of negative performance for US Treasuries? To put this into perspective, such a scenario has never occurred in history.


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