Market environment

September confirmed the slowdown in the US job market, which appears to be deteriorating faster than expected. Only 22,000 jobs were created in August, well below the forecast of 75,000, while the unemployment rate edged up to 4.3%. These uncertainties prompted the Fed to cut its key interest rate by 25 bps after a long pause. With inflation remaining moderate, further easing is likely, and two additional 25 bps cuts are expected before year-end. Against this backdrop, the US 10-year Treasury yield fell by 8 bps in September, despite the announcement of new tariffs on products such as wood and foreign films. In the eurozone, economic activity remains resilient, and the labor market continues to show strength. Headline inflation in August stood at 2% year-on-year, with core inflation at 2.3%. Ahead of the upcoming budget debate, Fitch downgraded France’s sovereign credit rating from ‘high quality’ to ‘average quality’, moving it from AA to A+ with a stable outlook. The agency attributed the downgrade to political instability, weakening the country’s capacity to implement significant fiscal consolidation. In contrast, Fitch upgraded Portugal’s rating from A- to A (stable outlook), raised Italy’s rating to BBB+, and upgraded Spain’s rating to A (stable outlook).

Interest rate trends and performance

The overall euro sovereign debt market performed well in September (+0.45%), helped by an easing of long-term rates and a tightening of spreads. The 10-year BTP-Bund spread narrowed by 4 bps to 82 bps, while the 10-year OAT-Bund spread widened by 3 bps to 82 bps. The performance of US debt (+0.46%) was also helped by the easing of long maturities (-8 bps for the 10-year rate and -20 bps for the 30-year rate). The overall performance of the sovereign debt market (in euros) is positive at +1.34% YTD.

Central banks

In the US, the Fed resumed its rate cuts (-25 bps on September 17). FOMC members still expect two additional 25 bps reductions before year-end, but remain cautious about the longer-term outlook given persistently high inflation. This stance points to a temporary adjustment rather than the start of a full easing cycle. In Europe, both the ECB and the Bank of England left their policy rates unchanged. The ECB appears to be approaching the end of its easing phase, with Christine Lagarde reiterating that current rates are appropriate. The BoE continues to follow a “gradual and cautious” approach in response to high inflation, and has announced plans to reduce its balance sheet by £70 billion over the next 12 months starting in October, down from nearly £100 billion currently.

Investment Grade Corporate Credit

Performance and Spreads: Credit spreads tightened on senior bonds (-4 bps) and more significantly on hybrids (-14 bps). Despite some pressure on German 5-year yields and a bout of risk aversion towards French sovereign debt early in the month, the segment delivered a positive return of +0.39% in September, supported by the contribution from spread tightening.

Primary market: September saw exceptionally strong issuance, totaling roughly €46 billion, which was well absorbed by the market, with order books oversubscribed by more than three times on average. Notable deals included Heineken’s multi-tranche €2 billion offering to finance its acquisition of FIFCO. In real estate, Aroundtown placed €850 million in 5-year notes. In the hybrid space, Evonik launched a €500 million green bond, Danone issued a €500 million perpetual hybrid, and URW came to market with a new €685 million perpetual hybrid for refinancing purposes.

Sectors: All sectors saw tightening, with retail (-9bps), energy (-7bps) and consumer (-6bps) outperforming. 

Fundamentals: In September, Evkonik (chemicals), Porsche AG and Volkswagen (automotive) issued profit warnings. In the utilities sector, Ørsted obtained court approval to resume construction of the Revolution Wind offshore wind farm, which had been suspended in August, removing uncertainty as the project is already 80% complete. In terms of ratings, Moody's downgraded Suedzucker AG from Baa2 to Baa3. Conversely, the agency upgraded the ratings of Airbus and EssilorLuxottica (A1/stable). Fitch raised Aeroporti di Roma's rating from BBB- to BBB, with a stable outlook. This improvement follows the upgrade of Mundys's rating. EasyJet was also rewarded by S&P with an upgrade to BBB+ with a stable outlook thanks to its robust operating performance, strong balance sheet, and excellent liquidity profile.

High Yield Corporate Credit

Performance and spreads: The segment performed well in September (+0.58%), mainly thanks to carry. The tightening of spreads (-13 bps) was partially offset by slight tension on the German 5-year (+6 bps). B-rated credits performed better, while CCC-rated names ended the month in negative territory.

Primary market: The primary market was particularly active, with €20.7 billion issued in September, making it the second most active month this year after June. There was little impact on the market, as the new bonds were mainly used to refinance existing debt and were concentrated on BB ratings.

Sectors: The energy sector was buoyed by Viridien and Pemex, the latter expected to receive Mexican government aid to repay its debts. Technology progressed thanks to Atos, which has partnered with the French National Guard on a defense initiative. Real estate is benefiting from stabilizing valuations and expectations of lower interest rates. By contrast, transportation was the only sector to post a negative performance.

Fundamentals: September was marked by strong M&A activity. Key transactions included Telefónica-Vodafone Spain, Elior-OnePlace, Orange’s purchase of MasOrange, and the Paramount Skydance-Warner Bros Discovery deal, which triggered a rally in Warner Bros bonds. Also noteworthy were the CapVest Partners-Stada, Dorf Ketal-Italmatch and Blackstone/EQT-Urbaser deals.

On the ratings front, Moody’s upgraded InPost to Ba1, Fitch raised Mundys to BB+, and S&P upgraded Assemblin to B+. Conversely, Fitch revised Evoca’s outlook, while Moody’s downgraded Kantar to B3, Eramet to B1 (negative outlook), Ineos Group to B1, Ineos Quattro to B2 (negative outlook), and Cerba to Caa2.

Financial debt

Performance and spreads: Over the month, bank spreads narrowed across the entire capital structure: -6 bps on Seniors, -17 bps on Tier 2 and -20 bps on AT1s (-22 bps for €AT1). In the insurance sector, spreads narrowed by -1 bp on Senior bonds and -11 bps on Subordinated bonds. Performance was positive: senior bank bonds posted +0.3%, Tier 2 bank bonds +0.7% and AT1 bonds +1.1% (+1.2% on €AT1s). Senior insurance bonds rose +0.2% and subordinated bonds +0.8%.

Primary market: The primary market was active, with the issuance of several Tier 2 bonds (NordLB, Moneta Bank, Bank of Cyprus, Permanent TSB, Aldermore), as well as AT1 bonds in US dollars (ING, Crédit Agricole, Nordea, Royal Bank of Canada), euros (Abanca, Raiffeisen Bank, SocGen, Caixabank, RCI Banque) and sterling (Natwest, Vanquis). On the insurance side, SCOR issued a Tier 2 bond, while Sampo and Generali issued RT1 bonds. 

Fundamentals: The publication of half-year results has come to an end. Several banks are still posting excellent operating performances (Crédit Mutuel Arkéa +17%, Zopa +256%). Among insurers, several players posted sharp increases in net profits (Helvetia +23.5%, M&G +£253m, Fidelidade +28%, Baloise +25.5%, Athora +£359m, Groupama +13%, Aéma +63%). On the M&A front, Sabadell once again rejected BBVA's improved takeover bid, while Monte dei Paschi's bid for Mediobanca was ultimately a resounding success, with a favorable participation rate of 86%. In Italy, reports indicate that Crédit Agricole is exploring options for BPM, while in the Netherlands, KBC has denied a possible acquisition of ABN Amro. On the ratings front, S&P raised BBVA and Caixabank's ratings from A to A+. Fitch raised the ratings of several Italian banks: Intesa (BBB to A-), Unicredit (BBB+ to A-) and Credem (BBB to BBB+). Following Fitch's downgrade of France's rating, La Banque Postale was downgraded by one notch, as was CNP. 

Outlook

Market environment

• In the United States, the government shutdown began on October 1, halting the publication of certain economic indicators, including employment data. At the same time, the president has threatened to accelerate public spending cuts to pressure the Democratic Party. This environment leaves the Federal Reserve with reduced visibility and heightens the likelihood of weaker growth. In the near term, it reinforces expectations for additional rate cuts before year-end.
• In the eurozone, third-quarter data suggest that economic activity remains resilient despite trade tensions with the United States. Autumn will see the start of the public budget debate season, with political fragmentation in some countries likely to lead to endless debates and complicate fiscal decision-making. French debt will be particularly scrutinized in the current context of political failure. This will limit the ability to reduce the deficit, which will weigh on the OAT/Bund spread, whose potential for narrowing currently appears limited.
• In the credit market, fundamentals remain solid, with default rates expected to decline over the next 12 months. Inflows remain robust and largely positive across all segments, confirming investors' continued appetite. Third-quarter earnings season is about to begin and will be closely watched. While credit spreads remain tight, current interest rate levels continue to support the appeal of the asset class. Against the backdrop of a slowing US economy, we are increasing our preference for European credit, particularly high yield, over the US market.

Positioning

• Duration/Rates: UK (+), US (=/+), Euro (=/+), Japan (=).
• Credit: Constructive on investment grade credit, euro high yield and subordinated debt.
• Maturity: Preference for short to intermediate maturities.
• Sectors: Banks, telecoms, healthcare, real estate.