Fixed Income Newsletter - June 2026

Market Environment

May 2026 was marked by important developments in the Middle East. The regional situation became more stable after the announcement of a framework agreement between China, the United States and Iran that includes a 60‑day ceasefire. This sign of reduced tensions between Washington and Tehran, despite a security environment that remains fragile, led to a sharp decline in oil prices. The price of Brent crude fell by 19% in May to $92, after reaching $125 in late April.

In the U.S., the economy is sending mixed signals, with slower growth and inflation that remains persistent. GDP growth for the first quarter was revised to 1.6%, compared with an expected 2.0%. While the April PCE index slowed to 0.4%, other indicators such as ISM input prices and producer prices (+6% in April) are raising concerns about a possible return of stronger inflation. The labor market remains solid, with job creation of +115,000 in April and +172,000 in May, and unemployment at 4.3%. Wage growth has moderated to +3.6% year‑on‑year, which gives the Federal Reserve some room to keep interest rates unchanged at 3.50%–3.75%. However, some policymakers, including Kashkari and Logan, are calling for an end to the current accommodative policy because energy and service prices remain strong. This situation has put pressure on short‑term bond yields. U.S. yields increased, with the two‑year yield rising by 14 bps to 4.00%, and the ten‑year yield rising by 6 bps to 4.44%.

In the eurozone, government bonds benefited from improved geopolitical expectations. The German 2‑year yield declined by 11 bps to 2.53%, while the 10‑year yield fell below 3%, reaching 2.94%. Recent macroeconomic indicators increasingly suggest a stagflation environment, with weaker business surveys and rising inflation expectations. Headline inflation was confirmed at 3.0% in April, in line with expectations, but leading indicators point to persistent price pressures. Core inflation remained stable at 2.2%, but it could increase due to higher producer prices and energy costs. In addition, the ECB’s one‑year inflation expectations rose sharply from 2.5% to 4.0%, increasing the risk that inflation expectations become less well anchored – a major challenge for the ECB’s credibility.

In the U.K., the bond market eased due to lower‑than‑expected inflation and a clear slowdown in economic activity. Headline inflation fell to 2.8% in April, while services inflation – an important indicator for the Bank of England – stood at 3.2%. At the same time, the services sector moved into contraction, indicating a slowdown in the country’s main source of growth. The labor market is also weakening, with the unemployment rate rising to 5.0% and a net loss of 100,000 jobs in April. Political uncertainty is also increasing, contributing to a higher risk premium on long‑term government bonds.

Overall, the global sovereign bond market delivered a positive performance of +0.40% in May, bringing year‑to‑date performance to -0.35%, expressed in euros.

Corporate Investment Grade

Performance and Spreads: Credit spreads tightened across the entire capital structure (Senior -2 bps, Hybrids -9 bps) amid persistent volatility linked to tensions in the Middle East, despite more favorable signals at the end of the month. The asset class posted a positive return of +0.94%, driven by easing rates and, to a lesser extent, spread and carry components.

Primary market: Activity in the primary market remained very strong, with around €65 billion issued in May. The largest transaction was Alphabet’s €9 billion deal across six tranches. In the technology sector, SAP also issued €3.5 billion through a four‑tranche transaction. In the airline sector, Lufthansa and IAG completed refinancing deals despite a challenging environment, and both obtained relatively favorable issuance conditions. In the hybrid segment, Carlsberg successfully completed its first hybrid bond issuance, raising €1.8 billion through two tranches (Perp NC5.25 and Perp NC8).

Sectors: All sectors are tightening. The automotive sector outperformed over the month, followed by energy and retail. Conversely, leisure, telecoms, real estate, and utilities underperformed.

Fundamentals: Q1 2026 earnings releases continue, with the vast majority of issuers confirming their 2026 outlook. In telecoms, Deutsche Telekom stands out with better-than-expected results and a rating upgrade by S&P to A-. In real estate, Klépierre posted a strong Q1. In the automotive sector, Stellantis presented an ambitious strategic plan centered on four brands and targeting significant revenue growth in Europe and North America. Finally, Arkema, Alstom, Eiffage, and Colonial reported results in line with expectations, with no impact on their credit profiles.

Among rating agencies, this month’s moves reflect contrasting trajectories. Fitch revised Carlsberg’s (BBB+) outlook to stable, citing faster-than-expected deleveraging. Conversely, S&P placed Sodexo on negative outlook due to operational difficulties. Suedzucker was subject to a similar revision by S&P, as the pace of deleveraging fell short of expectations. Finally, S&P indicated that Publicis’s BBB+ rating would be maintained in the event of the acquisition of LiveRamp for approximately $2.2 billion.

Corporate High Yield

Performance and spreads: European high yield continued to recover, posting a +1.0% return in May, driven both by a further narrowing of spreads by -20 bps to close at 261 bps, and by an 11-bps decline in 5-year yields, which ended at 2.63%.

Primary market: The primary market was active, with €11.7 billion in new issuances, still primarily for refinancing purposes. Notable issuances included a single LBO financing (BASF Coatings) and an M&A financing (Molins), as well as two companies refinancing loans with bonds (DomusVie and Opella).

Sectors: All sectors posted positive returns, with capital goods (Fedrigoni, Ardagh, Evoca), transportation (Air Baltic, Air France, Lufthansa), and basic industries (Arxada, Synthomer, Victorai) delivering the strongest performance. Conversely, the automotive (Antolin) and media (Telecolombus) sectors are underperforming, driven by factors specific to individual companies.

Fundamentals: Sectors that had suffered from rising oil prices, such as transportation and capital goods, are outperforming amid falling oil prices. The chemicals sector continues to perform well, supported by a positive outlook for the second quarter. On the rating front, upgrades and downgrades are balanced. Assemblin was upgraded to B1 by Moody’s and to B+ by Fitch thanks to an improved operational profile. Moody’s upgraded Biogroup to B2 following the refinancing of its capital structure. Conversely, S&P downgraded Centrient to B-, noting that its recovery depends on a highly uncertain competitive environment. Moody’s downgraded Ontex’s outlook to negative due to cost inflation weighing on its EBITDA recovery trajectory.

Financial Debt

Performance and spreads: Spreads narrowed slightly over the month: -1 bp for bank senior bonds, -5 bps for Tier 2 bonds, and -1 bp for AT1 bonds (€AT1: -8 bps). In the insurance sector, senior bond spreads remained stable, while the spread on subordinated bonds narrowed by -4 bps. Performance was positive over the month: bank senior bonds posted +0.7%, Tier 2 bonds +0.9%, and AT1 bonds +0.6% (€AT1 +1.3%). In the insurance sector, senior bonds posted +0.7% in May and subordinated bonds +1.1%.

Primary market: The primary market was very active, with €16.2 billion in subordinated bond issuance. The Tier 2 segment was particularly active, with numerous euro-denominated issues (ING, Triodos, UniCredit, and Bank Millennium) and two sterling-denominated issues (Barclays and Vanquis). In addition, many insurers issued in euros: Aviva, AXA, BNP Cardif (dual tranche), Generali, Intesa Sanpolo Assicurazioni, SCOR, and Uniqa. In the AT1 segment, BPER, Deutsche Bank, and Unicaja issued in euros, while Santander, HSBC, SEB, and Standard Chartered issued in dollars.

Fundamentals: Earnings released this month confirm solid momentum on both sides of the Atlantic. Canadian banks stand out in particular, with year-over-year profit increases ranging from +15% to +34%. In Europe, the trend is also positive, with results generally on the rise, driven by volume growth and record investment banking revenues. On the insurance side, major companies are posting double-digit increases in premiums and earnings, with robust solvency ratios.

In terms of mergers and acquisitions, the Belgian insurer Ageas is reportedly considering a strategic acquisition of a 5% stake in BCP. This move comes amid speculation that Fosun may be looking to sell its 20.45% stake in the Portuguese lender. In addition, UniCredit announced a non-binding agreement to sell part of the business of its Russian subsidiary, AO Bank, to a private investor based in the United Arab Emirates. Furthermore, a press report indicates that the Canadian company Intact is exploring the possibility of a takeover bid for Hiscox.

Outlook

Market Environment

The announcement of a memorandum of understanding between Washington and Tehran, and the possibility of a gradual reopening of the Strait of Hormuz, is reducing geopolitical risk premiums. This major easing of tensions should lead to lower oil and gas prices and reduce pressure on both short‑ and long‑term interest rates. The short end of the yield curve may still include too much risk premium if the Strait reopens before the summer. However, the global economy is unlikely to return to the same level of efficiency seen before the conflict. Transport and energy costs are likely to continue to include higher risk premiums, which could weigh on economic growth.

In this environment, a significant increase in interest rates by central banks appears unlikely. In the euro area, core inflation reached 2.5% year‑on‑year in May, which could support a 25‑basis‑point rate increase. However, based on current data, it is difficult to expect further increases at this stage. In the United States, inflation trends remain a concern, and the Federal Reserve is likely to remain cautious, especially given the strength of the labor market. Some policymakers, including L. Logan, believe that the Fed should raise rates. Markets are currently pricing in a 25‑basis‑point rate increase by the end of the year. The speed at which the Strait of Hormuz reopens will again be an important factor in reassuring markets about future inflation. This is particularly relevant as the position of the Trump administration in this conflict is becoming increasingly unclear. The House of Representatives has also passed a resolution calling for the withdrawal of U.S. troops. The U.S. yield curve could remain volatile in the coming weeks.

The credit market is gradually pricing in a resolution of the conflict. Expectations of easing tensions in the Middle East have supported investor sentiment toward the asset class. The Q1 2026 earnings season was strong and reassuring, with most companies keeping their outlook for 2026 unchanged. In this context, credit spreads have generally tightened, despite a temporary widening in the middle of the month that remained limited. It is true that current spread levels appear increasingly sensitive to negative developments, whether related to geopolitics or a sharp economic slowdown. However, the absolute level of interest rates continues to support the attractiveness of credit bonds. At the same time, uncertainty remains, and investors are closely watching for signs of an economic slowdown in the coming months.

If the conflict in the Middle East is resolved quickly, risky assets should outperform. A credible easing of tensions, including a lasting ceasefire and the reopening of the Strait of Hormuz, would likely lead to lower risk premiums on credit and peripheral sovereign bonds. Conversely, if the conflict continues for a longer period, the situation could worsen, with higher risk premiums. Persistently high oil prices in a context of tensions in the Strait of Hormuz could lead to a stagflationary environment, with persistent or rising inflation combined with weak economic growth. In such a situation, central banks could be forced to keep interest rates high or even increase them despite slower growth. This would put pressure on several areas at the same time: credit spreads (especially as they are currently at tight levels), peripheral sovereign spreads, and term premiums.

Positioning

•    Duration/Rates: UK (+), US (+), Eurozone (+), Japan (=)

•    Credit: Positive on Investment Grade Credit, Euro High Yield, and subordinated debt.

•    Maturity: Preference for short- to intermediate-term maturities.

•     Sectors: Banks, Telecoms, Healthcare, Real Estate, Chemicals.

Disclaimer

Document completed on June 9, 2026.

Document intended for professional clients as defined by MiFID.

This document has no pre-contractual or contractual value. It is provided to the recipient for informational purposes only. It contains analyses or descriptions prepared by Lazard Frères Gestion SAS based on general information and historical statistical data from public sources. The opinion expressed above is subject to change. Past performance is not indicative of future results.

These elements are provided for informational purposes only and do not in any way constitute a guarantee of future performance. These analyses or descriptions may be subject to interpretation depending on the methods used.

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