What happened last week?

Central banks

The release of the FOMC minutes has stirred the waters, casting doubt on the perceived certainty of a pause in rate hikes as currently priced in by the market. Two statements within the minutes appeared notably hawkish: first, a consensus among officials on significant upside risks to inflation, including the potential need for further tightening if demand doesn't sufficiently soften; and second, an indication from several officials that the balance sheet runoff may not conclude when rate cuts begin. Despite this, the market appears to overlook the possibility of another rate hike, with the probability of a 25bps increase by November 2023 remaining stable below 30%. In Europe, ECB's Latvian central bank chief, Kazaks, emphasized that any additional rate hikes would be modest, amplifying the uncertainty around the next move in September. Market sentiment echoes this, giving a 50% chance of a rate hike. In UK, the market has shifted to an 80% probability that the BoE will raise its key rate to 6% or higher by February 2024, propelled by July's inflation figures surpassing economists' expectations. Turning to the East, China's CB defied expectations by implementing its steepest interest rate cut in three years, a move spurred by yet another month of underwhelming economic data. Anecdotal but noteworthy, the Russia CB took decisive action by sharply raising its key rates from 8.5% to 12%, in response to the ruble's vulnerability amidst the ongoing conflict in Ukraine.


The tumultuous week saw a cascading impact from the sell-off in US Treasuries and the pronounced widening of Asian Investment Grade (IG) credit, resulting in a sharp broadening of spreads for US Corporate bonds. This week undoubtedly stands as one of the most challenging for US Investment Grade corporate bond indexes in 2023. The US IG indexes ballooned by approximately 10bps, while the surge was even more pronounced for US High Yield indexes, experiencing a widening of more than double that magnitude. In terms of total returns, US IG indexes saw a nearly 1% drop, and the US High Yield sector experienced a loss of 0.75%. Notably, data from BlackRock reveals that a substantial 50% of bonds in the US high yield index currently rest below 300bps. This figure is in stark contrast to the historical average of 500bps for the US High Yield index, shedding light on the unusual dynamics in the current market landscape. In the European arena, the comparatively milder sell-off in European government bonds mitigated the impact on the European credit market, which experienced more modest losses of approximately 0.2% for both the EUR IG and HY indexes. European subordinated debts emerged as underperformers this week, dipping by 0.7%, mirroring the overall risk-averse sentiment that pervaded the market this week.


The past week witnessed the revival of bear steepening in the US, as the yield curve (5s30s) transitioned back into positive territory. This occurrence coincided with another surge in the US economic surprise index, underscoring the remarkable resilience of the US economy. Notable thresholds were breached this week, most notably the US 10-year Treasury yield, now trading above the peak of this hike cycle at 4.24% (observed in October 2022). Despite the pronounced sell-off in US Treasuries, inflows persisted, marking the 27th consecutive week of positive flow and paving the way for a potentially record-breaking year. It's worth noting that the Bloomberg US Treasuries index has now turned negative in terms of year-to-date performance. Should this trend continue, the US Treasury market is poised to experience an unprecedented third consecutive year of negative annual performance. In Europe, the upward movement was comparatively muted, with the German 10-year yield hovering around 2.6%, mirroring its level from the prior week. Notably, the long end of the German yield curve surpassed its prior cycle peak, reaching 2.70%. The shift in investor sentiment led to a 10bps widening of the spread between Italian and German 10-year yields, which now stands above 170. Across the Channel, the UK's 10-year yield surged to a high last seen in 2008, hitting 4.75% on Thursday before retracing slightly by week's end. Meanwhile, in Japan, a lackluster 20-year Japanese Government Auction propelled long-end Japanese yields to their highest levels since February, concluding the week with the 10-year Japan yield at 0.65%.

Emerging market

The past week proved challenging for Emerging Market fixed income, as a confluence of factors including China's turmoil, the US Treasury sell-off, and a strengthening US dollar intensified pressures on this segment. The CDX EM index, encompassing the cost of hedging against default for 20 emerging economies, soared above 224 bps, marking its highest point since June. EM sovereign bonds took a significant hit, experiencing a decline of around 2% over the week, while corporate bonds fared relatively better with losses of less than 1%. In local currency terms, the EM index registered a drop of over 1%. The distress in China's real estate sector deepened, evident in the 43% plummet in the value of residential sales nationwide in July compared to June, reaching 654.5 billion yuan ($90 billion) - the lowest monthly sales in nearly six years. Country Garden's impending bond default risk, coupled with warnings of widespread losses from state-owned peers, has instilled concerns within the market. Consequently, the cost of default protection for high-grade issuers in Asia ex-Japan surged by 35 bps, marking the most substantial weekly widening in 11 months. Argentina faced its own challenges, as sovereign bonds underwent heavy selling. The primary elections saw outsider Javier Milei emerge victorious ahead of the final elections scheduled for October 22nd, introducing additional uncertainties into the mix.


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

Global Credit Markets Reel from US Treasuries Sell-Off and China Turmoil!


Source: Bloomberg

Global credit markets experienced a pronounced widening amid the tumultuous backdrop of a US Treasury sell-off and the ongoing situation in China. The iTraxx CDS Asian ex Japan Investment Grade index widened by over 35bps, marking its most challenging week in nearly a year and causing ripple effects across other credit markets. Meanwhile, the iTraxx CDX US High Yield index surged past 460bps, reflecting a monthly widening of 60bps. The downward spiral in US Treasuries also cast a shadow over credit markets, as elevated refinancing costs raised concerns about potential delinquencies in US firms. Notably, Goldman Sachs reports that the combined notional value of defaulted debt in US high-yield bonds and leveraged loans has already surpassed the totals for the entire year of 2022.


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