Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

Central banks

In his Jackson Hole speech, Federal Reserve Chair Jerome Powell acknowledged the improved economic backdrop and tactfully hinted at a potential rate hike pause while also maintaining future pressure. Powell's statements align with the forecast of unchanged rates in September, but with the possibility of subsequent hikes. He emphasized a data-driven approach to decision-making, highlighted the current "restrictive" interest rate environment, and reaffirmed the Fed's 2% inflation target. Following Powell's speech, the market anticipates a 20% likelihood of a rate hike. In Europe, recent insights from the ECB shed light on a growing inclination towards a potential pause in monetary policy for the forthcoming September meeting. Prominent Council members, notably ECB Chief Economist Lane, Bundesbank President Nagel, and Banco de Portugal President Centeno, have shared cautious perspectives, indicating an increasing leaning towards this path. With the decision date looming and crucial data such as inflation indicators and macroeconomic projections still pending, the momentum for a policy pause appears to be gaining strength. Currently, the market assigns only a one-third probability of a 25 bps hike at the September meeting. Meanwhile, in the UK, market expectations have moderated but still suggest the possibility of the Bank of England hiking by more than 25 bps at their September session.


As the calm end of summer approaches, the US credit market experienced a relatively uneventful week, surpassing the performance of the government bond market due to tighter credit spreads that generated positive excess returns. Both Investment Grade (IG) and High Yield (HY) credit spreads tightened by 5bps to 120bps and 10bps to 382bps, respectively, over the course of this week. However, the upcoming period might witness heightened activity, as IG issuers gear up to inundate the US primary market with new debt offerings in September, especially in the days following the US Labor Day holiday. Financial institutions are predicting around $120 billion in issuance next month, surpassing the $78 billion issued in September 2022. In Europe, the Euro credit market displayed a mixed trend. Investment-grade and high-yield credit spreads widened by 3bps and 11bps, respectively, but managed to end the week positively, influenced by the performance of European rates. The European IG primary market in August initially had a subdued start but picked up momentum this week, culminating in the pricing of €7.3 billion. Although this marks the strongest week since June's conclusion, it offers a glimpse of what the upcoming weeks could bring. Foreseen volume improvements in the coming weeks and September might add pressure to secondary spreads. On the demand side, both Euro Investment Grade and High Yield funds experienced outflows.


US Treasuries exhibited stability this week, driven by decreased volatility; however, the effect of Powell's Jackson Hole speech almost entirely nullified the weekly gains. The bear flattening trend resumed, with the US yield curve (2s10s) flattening by over 10bps, dipping below -80bps. Investors continued to amass US Treasury bonds, marking the 28th consecutive week of inflows, the longest streak since 2010. The divergence between the US and Europe intensified to a 2023 peak, as the gap between 5-year US and German yields reached its highest point of the year at 190bps, reflecting renewed macroeconomic challenges in the Eurozone and the prospect of an ECB policy pause. In Europe, the week was marked by relative tranquility, with the anticipation of a potential pause at the upcoming ECB meeting and subdued European PMIs, underscoring a significant economic deterioration across the continent. German government bonds achieved a half-percent gain during the week, though they were outperformed by peripheral bonds.. The spread between Italian and German 10-year yields tightened slightly. The German 10-year yield concluded the week just above 2.5%. In the UK, the government bond market displayed robust performance, with the 10-year UK yield receding below 4.5%, reflecting a 20bps decrease over the week. Similarly, the UK rate market benefited from weak economic data, emphasizing the potential for further future deterioration. Lastly, in Japan, the 10-year government yield reached a new high at 0.68% before settling the week at 0.66%, marking a 3bps increase compared to the previous week.

Emerging market

Mirroring the stabilization of US yields this week, emerging market bond indices all closed the week in positive territory. EM sovereign bonds were the top performers (+0.8%), as spreads tightened by 10 basis points during the week. However, they remain the worst performers for the month to date (-2%), with spreads having widened by 20 basis points so far. In the realm of EM corporate bonds, spreads remained flat over the week and continue to be 10 basis points tighter for the month. Local EM debt also performed well as EM currencies rebounded against the dollar by 1%, though they are still down 1.4% in August. Despite a positive week and lower volatility, August's performance so far remains deeply negative for EM assets, with sovereign bonds down by -1.6%, corporate bonds by -2.3%, and local debt by -2%. In Asia, Chinese credit has slightly regained ground, with both Investment Grade (IG) and High Yield (HY) bonds posting their first weekly gains in August. China HY bonds have ended their longest losing streak in nine months. In Turkey, the Turkish Central Bank has taken a significant step in its battle against inflation by implementing a sizable rate hike of 750 basis points, bringing rates to 25%. This move was unexpected, as the market had anticipated a more "modest" hike to 20%. Turkish fixed income assets have responded positively, with the Turkey 5-year Credit Default Swaps (CDS) retreating below 400 basis points.


Our view on fixed income (August)

We raise our stance on rates to Positive (from Cautious), reflecting our view that there is now an attractive asymmetry on long-term rates ahead of the expected slowdown in growth and inflation in H2. Long-term government bonds are also attractive from a portfolio construction’s point of view as they provide again diversification for the equity allocation.


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.



Emerging market bonds have rallied impressively, outperforming investment grade US corporate bonds by more than 5% over the past six months. But rising idiosyncratic risks and the tight premium to investment grade bonds make us tactically cautious.

The Chart of the week

2-Year US Treasury Yield Resurges Above 5%!


Source: Bloomberg

The resurgence of the two-year US Treasury yield above 5% underlines the prevailing market sentiment of a "high rates for a long time" scenario. This trend provides an insight into how the market interprets potential Federal Reserve actions in the months ahead. Notably, the market has currently discounted the likelihood of significant rate cuts, with projections indicating that a single rate cut is not expected until the second half of 2024. This change implies that the scenario of a soft landing is already well integrated into market expectations.


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