What happened last week?

Central banks

This week, the Federal Reserve's June FOMC minutes were released, and the market interpreted them as hawkish. It was evident that the unanimous decision regarding the rate hike pause was not as clear as initially implied by Powell during the press conference. Lorie Logan, of the Dallas Fed, emphasized that a rate hike at the June meeting would have been entirely appropriate. The market now expects two more rate hikes by the end of the year, which would bring the Fed's terminal rate to 5.75%. The first full rate cut is not anticipated before 2H24. In Europe, ECB President Lagarde and Governor Nagel reiterated the need for further restrictive monetary policy, considering that inflation levels remain elevated. Lagarde also highlighted the importance of monitoring the possibility of simultaneous increases in both company margins and wages. Nagel, on the other hand, stated that there are no signs of excessive tightening in bank lending conditions. The market has priced in more than two rate hikes and expects a terminal rate of 4% by January 2024. The RBA (Australia) kept its key rate unchanged at 4.1% due to softer data but did not rule out the possibility of further rate hikes. Finally, the Polish central bank kept its benchmark rate at 6.75% for the 10th meeting in a row, as inflation continued to slow, opening the way for discussions on the possibility of a rate cut later in the year.



After a fruitful first semester, credit indexes have faced challenges since the beginning of July, driven by a significant increase in interest rates and some weaknesses in credit spreads. The rise in real rates has exerted pressure on credit spreads, although the widening is more pronounced in the CDS market than the cash market. US Investment Grade (IG) corporate bonds have widened by 3bps, while the iTraxx CDX IG has widened by 5bps. In the high-yield segment, cash bond credit spreads have widened by 10bps, whereas the iTraxx CDX HY index has widened by 25bps. As of this month, US IG corporate bonds have experienced a decline of more than 1%, while US HY bonds are down by -0.75%, benefiting from the bear steepening as this segment is more sensitive to the front end of the yield curve. In Europe, credit indexes continue to outperform despite the turmoil in European equity markets. The European HY segment has remained almost flat over the week, while IG bonds have seen a decline of less than -0.5%, aided by a 5bps tightening in credit spreads. However, there is a notable dichotomy between the cash and synthetic markets. The iTraxx Xover index has widened by 20bps, while the credit spread of the Bloomberg European high-yield index has tightened by 5bps to 450bps. This discrepancy can be attributed to the positive inflows that fixed income has been attracting in recent weeks, while CDS are mainly hedged to provide quick portfolio protection.


This week witnessed the clearance of major resistances in the bond market, as the 2-year US Treasury yield surpassed 5%, while the 10-year and 30-year yields rose above 4%. The market responded by repricing the US Treasury yield curve, leading to bear steepening as the 2s10s spread decreased from 106 to 90bps over the week. Volatility surged, with the MOVE index experiencing a 24-point jump in a single day. This sharp repricing was initially triggered by central bankers delivering a more hawkish message than anticipated at the ECB Sintra Forum last week, and it was further accelerated by unexpected resilience in economic data. In fact, the Citi Economic Surprise Index reached a two-year high this week, indicating stronger-than-expected data surprises relative to market expectations. The sharp rise in interest rates was also amplified by market liquidity constraints. Factors such as the rebuilding of the Treasury General Account (TGA) and quantitative tightening (balance sheet reduction) have contributed to the deterioration of liquidity, exacerbating the rate volatility. In Europe, the breach of the key level around 2.5% on the 10-year German Bund yield marked a significant development too. This level had previously acted as a resistance, preventing higher rates in the short run. Notably, the French 2-year yield reached 3.5% for the first time since 2008. Additionally, some weaknesses have emerged in peripheral bond markets, which experienced greater widening compared to core rates. The spread between 10-year Italian and German yields reached 175bps, a level not seen since early June.


Emerging market

Emerging market bonds demonstrated resilience this week, as EM local currency bonds posted a modest gain supported by a weaker US dollar. Although hard currency bonds were affected by rising US interest rates, the tightening in credit spreads by more than 10bps helped offset the negative impact. While US treasuries experienced a decline of almost -1.5% over the week, EM corporate bonds only lost around 0.8%, while EM sovereign bonds were down 0.9%. In Latin America, the fight against inflation is heading in the right direction, as evidenced by Mexico's sustained moderation of inflation in June. This positive trend is expected to lead to a less restrictive monetary policy in the coming months. However, China continues to face challenges in achieving a sustainable economic recovery, particularly in the real estate market. Chinese high-yield dollar bonds recorded their largest weekly loss since November 2022, driven by concerns surrounding state-backed builder Sino-Ocean and the ongoing decline in new-home sales. To stimulate the economy, the People's Bank of China (PBOC) is likely to continue implementing accommodative monetary policies in the coming months

Our view on fixed income (June)

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

Heightened Volatility: Is the Fear of Rising Rates Returning?  


Source: Bloomberg

On Thursday, the MOVE index, a key measure of expected volatility in the U.S. Treasury bond market, surged by 24 points to reach 135, marking one of the most substantial jumps witnessed in the past decade. This significant increase suggests a resurgence of concerns regarding rising interest rates. The market's response can be partially attributed to a liquidity shortage experienced in the bond market, primarily driven by synchronized balance sheet reductions by central banks (Fed + ECB). As we navigate the challenging trading conditions and heightened volatility in the bond market during the summer period, a question arises: Will the persistent uncertainty surrounding the timing of the last interest rate hike prolong the rate fears and continue to fuel the market's volatility?


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