What happened last week?

Central banks

While some members of the Fed have suggested the possibility of another rate hike, the looming specter of a potential US government shutdown could significantly extend the pause in US monetary policy tightening. Neel Kashkari, President of the Minneapolis Fed, recently expressed on television that the Fed might ease up on its tightening efforts if a government shutdown or a strike by auto workers were to imperil economic growth. Furthermore, the Federal Reserve's preferred indicator of underlying inflation exhibited its most sluggish monthly uptick (+0.1%) since late 2020. This might provide the Fed with added comfort in adopting a wait-and-see approach. Presently, the market assigns a 38% probability of another rate hike by year-end, a notable drop from the 50% probability seen just a week ago. In Europe, the market is pricing in nearly zero chance of another rate hike in the current cycle, especially considering September's Eurozone inflation rate, which hit its lowest point in nearly two years, coinciding with the largest contraction in bank loans to Euro area corporates in over two years. Conversely, in the UK, the market is placing a 40% probability on a rate hike during the November BOE meeting and an almost 80% chance that the Bank of England will implement another hike within this cycle.


In the US, Investment Grade (IG) bonds saw a decline of nearly 2.5% over the month, primarily influenced by rising interest rates. Despite a busy IG primary market with over $120 billion priced in September, credit spreads barely moved, widening by only 2bps to 120bps. The CDX IG index also exhibited minimal changes over the month when adjusting for the impact of the S40 to S41 rolling on spreads. In the High Yield segment, the Bloomberg US High Yield index recorded a drop of over 1% in September, marking its first negative monthly performance since May 2023. While this segment is less sensitive to higher interest rates, credit spreads widened by almost 30bps over the month. In Europe, Investment Grade bonds experienced pressure, resulting in a 6bps widening of credit spreads over the week, but they remained largely unchanged over the month. The Bloomberg Euro Corporate Bond index posted a decline of more than 1% for the month, driven by the increase in interest rates. Conversely, European high yield managed to deliver a positive total return in September, marking the seventh consecutive month of positive performance. This resilience in a challenging fixed income market was propelled by a 15bps tightening of credit spreads. However, it was a challenging week for subordinated debt, as the Ice BofA Contingent Capital index lost over 1%, wiping out all the gains made during the month.


US Treasury yields ended the quarter at their highest levels in this current rate hike cycle, with real rates reaching levels not seen since 2008. The 10-year US Treasury yield briefly touched 4.6% before closing the week just above 4.5%, while the 10-year US Treasury real yield briefly exceeded 2.25%, a level not witnessed since 2008. On the contrary, the short end of the Treasury yield curve performed well, with the 2-year yield dropping by 10bps over the week to around 5%. US Treasury Inflation-Protected Securities (TIPS) also felt the impact of rising real yields, experiencing a drop of over 2% in the third quarter of 2023. In Europe, the substantial surge in global yields affected European rates, despite positive developments in inflation and a deteriorating economic outlook. The 10-year German yield touched nearly 3% before ending the week at about 2.8%, marking a 40bps increase over the month. For the first time since 2011, the 30-year German yield crossed the 3% threshold. Similarly, Italian yields surged, with the 10-year yield reaching 4.88%, its highest level since 2012. In the UK, yields also saw a significant rise this week, with the 10-year yield increasing by 17bps to 4.4%, while the 2-year yield closed the week at 4.85%, up 5bps over the week. In Canada, the 10-year yield surpassed 4% for the first time since 2007. Finally, the change in Governor Ueda's monetary policy and the potential end of negative rates had consequences in the Japanese fixed income market, as Japan's bonds experienced their worst quarter since 1998.

Emerging market

The past week and month have proven to be challenging for the Emerging Market (EM) fixed income segment. Increased interest rates and a stronger US Dollar have taken a toll on this sector. EM sovereign bonds lost 1.5% in just one week, accompanied by a 15bps credit spread widening. Local currency EM bonds experienced a 1% loss, while EM corporate bonds saw a 0.5% decrease. Throughout September, the poorest performers were EM sovereign bonds, with losses exceeding 3%, while EM local bonds faced over a 2% decline. EM corporate bonds also struggled in September, with a 1% decrease. In Asia, Chinese real estate bonds bore the brunt of the impact, plummeting by 6% during the week. This drop came as property stocks reached their lowest levels since 2011, effectively erasing all gains achieved earlier in September. Notably, Country Garden is in discussions with financial advisors regarding an offshore-debt restructuring plan. Meanwhile, in Asia's neighboring country, the Bank of Thailand decided to raise the key interest rate by 25bps to 2.5%, marking the eighth consecutive quarter-point increase. This move is anticipated to be the final one in this rate hike cycle, as the Bank of Thailand eliminated any reference to further rate hikes. Additionally, Fitch's upgrade of Oman to BB+, which was well-expected by the market.

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

A dismal month for long-term U.S. Treasury yields!


Source: Bloomberg

The Bloomberg US Treasury 10y+ index has experienced a decline of over 7% this month, marking one of its worst monthly performances in the past decade. The last time the index registered such a decline was in September 2022. Since its inception in 2005, only four months have seen worse monthly performance. Notably, the 30-year US Treasury yield surged by nearly 50 basis points in September 2023, primarily propelled by a substantial increase in real rates, which climbed by 30 basis points. The prevailing narrative of higher rates for an extended period, increased fiscal spending, and the Federal Reserve's reduction of its balance sheet are among the key factors driving this significant movement.


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