What happened last week?

Central banks

The week witnessed surprising moves by central banks, driven by persistent concerns over inflation. The Norwegian Central Bank (Norges Bank) caught the market off guard by raising its key rate by 50 basis points (bps), double the expected increase. Similarly, the Bank of England (BOE) surprised the market with a substantial 50 bps rate hike, sending market expectations for the terminal rate to 6.25%, the highest since 1998. The BOE's proactive stance reflected their worries about inflationary pressures and their determination to maintain control. In contrast, the Swiss National Bank (SNB) adopted a more cautious approach, opting for a smaller 25 bps rate hike. They also hinted at another rate increase in September, emphasizing a careful balance between the economic recovery and price stability. Federal Reserve Chair Jerome Powell's speeches reinforced the Fed's commitment to raising further interest rates. Powell even suggested the possibility of two rate hikes, potentially in July and September. As a result, market expectations shifted to a single rate hike by September, with no further rate cuts expected in 2023. These developments demonstrate a global trend towards tighter monetary policy as central banks respond to inflation concerns. The question now arises: Are these central banks pushing the limits until a breaking point?


Hawkish speeches from Federal Reserve (Fed) members have caused ripples in the fixed income market, with the U.S. yield curve (2s/10s) hitting -100 basis points (bps) once again. This marks the second time, with the first being just before the SVB crisis, that the curve has inverted to such an extent during this hiking cycle. While the 10-year U.S. Treasury yield is now 10 bps lower than it was one week ago, the front end has remained unchanged. So far in June, the U.S. Treasury index is still down (-0.2%). Market concerns are growing that central banks may be going too far in their fight against inflation, potentially jeopardizing a soft landing for the economy. This sentiment was also reflected in UK rates, where the short-term yields experienced a modest jump of 10 bps, despite very hawkish BOE, while the 10-year yield dropped by 10 bps. UK government bonds have been among the worst performers in 2023, with a negative performance of more than -4%. In Europe, the situation appears to be deteriorating, particularly for peripheral bonds. The spread between Italian and German 10-year yields, after hitting a 1-year low at 156 bps last week, rebounded to 165 bps, driven by disappointing German PMI data. Following its highest level of the month (2.52%) at the beginning of the week, the German 10-year yield significantly dropped by 17 bps on Friday after the PMI release, closing at 2.32%.


After closing at 435 basis points (bps) last Friday, the lowest level since the SVB crisis, the spread of the iTraxx CDX HY index has rebounded by almost 30 bps and is currently trading at 463 bps. This CDS index serves as a reliable tracker of the US high yield market, reflecting the shift in sentiment over the week. Weak economic data releases, including US PMI, jobless claims, and the 14th consecutive monthly contractions in the leading economic index, coupled with hawkish speeches from Fed members, have contributed to this change in sentiment. Even in the most speculative segment, sentiment remained positive until this week, when we witnessed the lowest level of credit spread since February 2023 for CCC-rated bonds in the US, before initiating a new widening. In Europe, the iTraxx Xover index, which corresponds to the European equivalent of the CDX HY index, also widened after reaching its lowest spread level at 395 bps, currently trading around 416 bps. High yield indexes, which had delivered a strong year-to-date performance of over 5%, could potentially retrace slightly as we enter the summer. On the safer side, investment-grade bonds have remained relatively stable amid the prevailing negative investor sentiment, with both EUR and USD spreads widening by a few bps over the week. Finally, in the subordinated space, the market has retraced some of its solid June performance in line with the prevailing market sentiment.

Emerging market

In emerging markets, it appears that the end of the cycle is either near or already here, especially in Latin America. The Banco Central do Brazil maintained its key rate at 13.75% without clear intentions of cutting it in the short term. Similarly, Banco de Mexico decided to keep its key rate unchanged at 13.25%. Both central banks exercised caution, opting not to cut rates precipitously, and instead, preferred to wait for more evidence that inflation is under control before considering a more accommodative monetary policy. In China, the People's Bank of China (PBOC) disappointed the market despite cutting the bank's 1-year and 5-year Loan Prime Rates by 10 bps for the first time since August, falling short of the market consensus of a 15 bps cut. This decision added pressure, once again, on the China real estate bond market, which retraced half of its June performance, declining from +12% to +6%. In Turkey, the central bank's decision was disappointing, but this time from the opposite perspective. The Turkish Central Bank "only" raised its key rate to 15% from 8.5%, marking a return to a more orthodox monetary policy. Following President Erdogan's reelection, the 5-year Turkey CDS had been trading below 500 bps. However, after the smaller-than-expected rate hike (consensus was at 20%), the CDS sharply rebounded to 515 bps. Despite the high volatility in CDS and FX markets, Turkish corporate bonds denominated in hard currency remained one of the best-performing fixed income segments in June, with a positive return of +3%.

Our view on fixed income (May)

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

Time for the US high Yield to “decompress” ?


Source: Bloomberg

The ratio of US high-yield bond yields to US investment-grade bond yields is currently approaching its lowest level in the last decade. The combination of a resilient US economy and positive technical factors, such as low primary market volume, has pushed the high-yield segment into expensive territory. However, several factors may contribute to a potential decompression between the high-yield and investment-grade corporate bond markets. The summer period typically experiences reduced market activity and lower liquidity, which can amplify market movements. Additionally, the continuing hawkish stance of central banks and the recent sharp deterioration in the manufacturing segment of the US economy add to the mix. This combination of factors creates a potentially perfect cocktail for a divergence between the high-yield and investment-grade corporate bond markets. Is it time for US high-yield bonds to "decompress"?


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