Market environment

June saw a resurgence in demand for U.S. bonds. Signs of a slowdown in the labor market and the absence of inflationary pressures paved the way for a decline in U.S. yields. This trend was further supported by comments from Federal Reserve members hinting at the possibility of a rapid reduction in key interest rates. However, European yields—aside from peripheral debt—didn't benefit from this movement. Despite another rate cut, the European Central Bank (ECB) signaled that the era of monetary easing might be coming to an end in the near term. Adding to the pressure on German bonds was the announcement of Germany’s increased financing needs—nearly $15 billion for Q3—as well as its plans to boost military spending to 3.5% of GDP by 2029. Meanwhile, peripheral sovereign spreads tightened, with Italy's 10-year bond spread narrowing to below 90 basis points compared to German debt. Notably, U.S. intervention had only a minimal impact on sovereign debt markets.

Rates and performance

The overall sovereign debt market posted positive returns in June (+0.59%), driven largely by the strong performance of U.S. debt (+1.25%). The yield on the U.S. two-year Treasury fell 18 basis points to 3.72%, while the 10-year Treasury yield dropped 17 basis points to 4.23%. In contrast, the European sovereign bond market delivered negative returns (-0.23%). German two-year yields tightened by 9 basis points to 1.86%, and the 2-10 year yield curve steepened slightly by 2 basis points to 75 basis points. Within the eurozone, yield spreads narrowed modestly. The 10-year OAT-Bund spread tightened by 2 basis points to 68 basis points, while Italian bonds outperformed German debt by roughly 11 basis points.

Central banks 

June marked a pause for most major central banks, with a few exceptions. The ECB, Swiss National Bank, and Norges Bank all cut rates by 25 basis points. In the U.S., Federal Reserve Chair Jerome Powell emphasized a "wait-and-see" approach, stating that maintaining the current interest rates would allow for clearer insights from upcoming data. Inflation projections were revised upward for 2025, 2026, and 2027, while growth forecasts for 2025 and 2026 were adjusted downward. In Europe, ECB President Christine Lagarde adopted a more hawkish tone than expected, indicating that the central bank could be approaching a period of pause. Elsewhere, Japan’s central bank kept rates unchanged at 0.5%, as expected, while the Bank of England held its key rate steady at 4.25%, with six members voting for no change and three favoring a 25-basis-point cut.

Crédit Corporate Investment Grade

Performance and spreads: Credit spreads continued to narrow in June across the entire capital structure, with Senior spreads tightening by 7 bps and Hybrid spreads by 15 bps. The most downgraded ratings saw a more pronounced tightening. The asset class posted a slightly positive performance for the month, at +0.20%. This was driven by the tightening of spreads and carry, which helped to counteract the negative impact of interest rates.

Primary market: After a record May, momentum remained positive in June, with around €42 bn issued and well absorbed, with order books oversubscribed more than 3 times on average. Issuers in the automotive sector accounted for around 13% of supply with Stellantis, Honda and Mercedes Benz. Real estate was also well represented, with Heimstaden Bostad (Green) and Covivio (European Green Bond - EuGBS). Activity in the hybrid segment was also strong, with 5 issuers for a total of around €4.5 billion.

Sectors: All sectors tightened. Real estate, media and energy outperformed.

Fundamentals: Among issuers, Kering faced speculation about a potential real estate sale in New York, which temporarily weighed on its curve. In addition, the Group reported a drop in profitability and an unfavorable outlook for H1 2025. Warner Bros Discovery announced the demerger of its Streaming & Studios activities and launched a $14.6 bn bond buyback offer, but Fitch, Moody's and S&P downgraded its rating to High Yield, citing uncertainties linked to the restructuring. Metro AG has also moved into the High Yield category.

Corporate High Yield

Performance and spreads: The asset class gained 0.44% in June, driven by carry and a tightening of spreads by 7 basis points, which offset a slight increase of 9 basis points in the German 5-year yield.

Primary market: The primary market saw record activity, with €22.5 billion of issues, again mainly for refinancing purposes. B loans outperformed and CCC loans underperformed, penalized by idiosyncratic risk (Kem One, Victoria, Telecolumbus).

Sectors: Real estate (Aroundtown, CPI Property) continued its positive momentum since the start of the year. Energy (Viridien, Wintershall) benefited from the conflict in the Middle East. Capital goods (Ardagh, Alstom) also progressed. Conversely, the media sector was penalized by Telecolumbus, which published results below expectations. Chemicals (Kem One, Arxada, Ineos) suffered from uncertainties linked to the global economic situation.

Fundamentals: Eutelsat signed a €1 billion, 10-year agreement with the French Ministry of Defense, and announced a €1.35 billion capital increase. The month continued to be rich in acquisition projects (Grünenthal, Dana, Almaviva and Orange, which is considering buying the remaining 50% stake in MasOrange). Several spin-offs or planned spin-offs were also in the news (Grifols, VodafoneZiggo, Atos). On the IPO front, Bain and Cinven are in discussions regarding the sale of Stada. Cirsa has officially launched its IPO process. Finally, creditors are said to be in the process of preparing the restructuring of Cerba's debt. In terms of ratings, IPOs lead to rating upgrades. On the other hand, several downgrades were observed in the chemicals sector (Ineos Group, Ineos Quattro, Synthomer) and the automotive sector (ZF, Nissan).

Financial Debt

Performance and spreads: Bank spreads tightened by -8 bps on Seniors, -15 bps on Tier 2s, and -18 bps on AT1s (-38 bps for euro-denominated AT1s). For insurers, Seniors tightened by -1 bp, while Subordinated bonds tightened by -17 bps. In terms of performance: +0.3% for banking Seniors, +0.5% for Tier 2s, +1.4% for AT1s (+1.7% for euro-denominated AT1s), stable for insurance Seniors and +0.9% for insurance Subordinated bonds.

Primary market: The primary market was buoyant in June, with an issue volume of €77 bn, well above the historical average. Issues covered the entire capital structure, including AT1s (BNP Paribas, Piraeus Bank, Santander), RT1s (CNP), and Tier 2s (Commerzbank, Banco BPM, DZ Bank, Monte dei Paschi, PBB, Resolution Life, Klésia).

Fundamentals: On the M&A front, several major transactions marked the month. In Spain, BBVA obtained government approval for its takeover bid for Sabadell. In the UK, Banco Santander and Barclays are among the main candidates for the takeover of Sabadell's British subsidiary TSB, with a decision expected in July. BPCE has also announced plans to acquire Novo Banco in Portugal, while UniCredit has received EU approval to acquire Banco BPM in Italy. On the regulatory front, the Swiss government published its banking reform proposals, which mainly concern UBS. These reforms include an increase in capital requirements for foreign subsidiaries, raising the threshold from 60% to 100%, potentially requiring up to $23 billion in additional capital for the Swiss entity. Additionally, a reduction in the use of AT1 instruments as capital is being considered, creating an additional need for $18 billion. These measures will be implemented gradually over a period of 6 to 8 years, with potential enforcement starting as early as 2028.

Perspectives

Market environment

• US data reflect a slowdown in the economy in recent months. However, weekly jobless claims are not rising at this stage.

• The impact of tariffs on consumption is not yet visible. Tariff revenues have significantly increased in recent weeks, while the effects of the "Big Beautiful Bill" will only start to be felt next year.

• In the eurozone, the latest data point to decent growth.

• In China, the easing of trade relations with the United States is limiting the risks to short-term activity.

• Spreads are likely to remain tight against a backdrop of solid fundamentals and very positive technical factors for credit. With yields still attractive and curves steeper, we prefer intermediate maturities.

Positioning

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

• Credit: Neutral on Investment Grade credit, High Yield and subordinated debt.

• Maturity: Preference for short to intermediate maturities.

• Sectors: Banking, Telecoms, Healthcare, Real Estate.