Fixed Income Newsletter - September 2026

Market Environment

Renewed tensions in the U.S.–Iran conflict pushed Brent crude oil back to around USD 90 per barrel by month-end, bringing inflation and energy-supply disruption concerns back into focus. Shipping volumes through the Strait of Hormuz remained well below pre-conflict levels.

The month was also marked by the annual Jackson Hole symposium. The new Federal Reserve Chair, Kevin Warsh, reaffirmed the Fed’s 2% PCE inflation objective, describing it as a “firm and fixed target.” While summer inflation data had been more favourable than expected, he noted that it was still too early to conclude that underlying inflation trends had improved on a sustained basis. This notably hawkish message increased the likelihood of a possible rate hike as early as September, although policymakers will first assess the August inflation report. Bank of England Governor Andrew Bailey, who also attended the symposium, maintained a cautious tone but did not signal any change in monetary policy.

In the United States, the Federal Reserve did not hold a meeting in August; the next meeting is scheduled for September 16. Markets are pricing in a probability of nearly 70% for a rate hike at that time. Against this backdrop, the US Treasury curve flattened modestly. The two-year yield rose by 6 bps to 4.34%, while the 10-year yield was broadly unchanged at 4.75% at month-end. The front end of the curve was more sensitive to the Fed’s hawkish communication than longer-dated maturities. At the same time, July inflation data were broadly reassuring, particularly on core inflation, which appears to be stabilising.

In the Eurozone, the German two-year yield rose by 12 bps to 2.94%, while the 10-year yield closed at its highest level since 2011, at 3.32%. The ECB also did not hold a meeting in August; the next meeting is scheduled for September 10. July headline inflation was unchanged at 2.9% year-on-year, while core inflation remained stable at 2.5%. But gas prices rose by nearly 20% over the month, leading markets to price in a 25-bps increase in the deposit rate at the September meeting, to 2.50%, with an approximately 80% probability of another hike by December. The OAT-Bund spread widened significantly over the month to about 85 bps, while the 10-year BTPS-Bund spread remained near 83 bps. French 10-year yields moved above Italian yields for the first time in several months.

In the United Kingdom, the Bank of England’s next meeting is scheduled for September 17. Gilt yields continued to edge higher across the curve, reflecting the broader rise in developed-market sovereign yields and the more hawkish tone adopted by major central banks. The 10-year gilt yield moved above 5% at month-end.

Overall, the euro-denominated sovereign bond market delivered a negative return of –0.14% in August, bringing the year-to-date return to -1.29%.

Corporate Investment Grade

Performance and Spreads : Senior bond spreads were unchanged over August, while hybrid spreads tightened by 5 bps, despite significant upward pressure on underlying government bond yields. The asset class returned -0.25% over the month, with the negative contribution from rates more than offsetting the modest benefit from spread tightening.

Primary Market : Primary market activity was concentrated in the second half of August, with total issuance reaching €24bn after a quiet start to the month, during which only one transaction was completed: Eurogrid (€500 million, 12-year maturity). Thales returned to the market after a three-year hiatus (€1bn). AstraZeneca placed four tranches totaling €2.5bn alongside Veolia, Sodexo, Continental, Caterpillar Financial, Philips, Cofiroute and Klépierre. The hybrid primary market was driven by three debut issuances: Sika with a dual tranche totaling €1bn (30 NC 5.75 and 30 NC 8.75), Swisscom (€500m perpetual bond at 5%) and TenneT Germany in two tranches totaling €2.6 billion (30.25 NC 5.25 and 30.5 NC 8.5). The average coverage ratio was 3.2x, with stronger demand for hybrid securities (4.5x on average).

Sectors : Sector dispersion remained narrow (-3 to +2 bps). The automotive and energy sectors outperformed, while media and real estate underperformed.

Fundamentals : Half-year earnings were the main focus in August. In real estate, Vonovia, Grand City Properties and Aroundtown reported solid results and reaffirmed their 2026 guidance. In utilities, EDF lowered its 2026 guidance due to weaker market prices, while net debt remained stable and leverage stood at 1.8x. Pernod Ricard disappointed, reporting lower organic revenue and revising down its medium-term outlook. Stellantis faced the recall of 850,000 vehicles in the US and a doubling of tariffs to 50% on models assembled in Windsor. On ratings, Moody’s upgraded Teva to IG and raised Evonik and Unibail-Rodamco-Westfield from Baa2 to Baa1. It also upgraded four Vodafone hybrid bonds from Ba1 to Baa3 following changes to their subordination clauses. S&P upgraded Securitas from BBB to BBB+, while Fitch revised Fresenius SE’s BBB– outlook to positive. Conversely, Moody’s placed easyJet under review for downgrade and S&P put the company on negative watch.

Corporate High Yield

Performance and Spreads: August was marked by rising rates, but this trend was more than offset by a narrowing of spreads (-7 bps) and persistently high carry, enabling the European high-yield market to post a resilient return of +0.32%. The narrowing of spreads was notably supported by solid second-quarter earnings, with outlooks confirmed in most cases. B-rated bonds outperformed BB-rated bonds, while CCC-rated bonds ended the month in negative territory.

Primary Market: The primary market remained virtually closed in August, with only €0.6bn issued during the month. Activity was limited to a few niche transactions.

Sectors: The technology (ams OSRAM, Atos, TeamSystem), packaging (Toucan, Ardagh, Ardagh Metal Packaging, Stora Enso), and real estate (CPI, Aroundtown) posted the strongest performances, supported by strong second-quarter results. Conversely, the media (Tele Columbus), leisure (Merlin, Evoke), and telecommunications (Altice, Virgin Media, SFR, SES) posted negative returns over the month.

Fundamentals: August reinforced investor focus on the artificial intelligence and data-centre theme. SoftBank continued to fund its $40bn commitment to OpenAI, while CoreWeave raised its annual guidance and increased its 2026 investment plan to almost $3bn. In satellite communications, Eutelsat and SES reached a further milestone in the European IRIS programme, whose total cost is now estimated at €15.6bn.

The month also saw several IPO announcements, including Aggreko and Mahle’s Indian subsidiary. On ratings, Moody’s upgrade of Teva to IG highlighted the potential for further positive rating momentum elsewhere: Telecom Italia was placed on positive watch by all three major rating agencies following approval of Poste Italiane’s offer. Conversely, Fitch downgraded Coty by two notches to BB-, following the termination of its Gucci Beauty licence.

Financial Debt

Performance and Spreads: In August, the spread on senior bank bonds remained unchanged; Tier 2 bank bonds rose by 1 bp, while AT1 spreads narrowed by 8 bps (€AT1s: -5 bps). In the insurance sector, the spread on senior bonds was stable, while that on subordinated bonds widened slightly (+2 bps). Performance was generally stable: bank senior bonds ended flat, while insurance senior and subordinated bonds each declined by -0.1%. Bank Tier 2 bonds rose by +0.1%, while AT1 bonds posted a gain of +0.4% (€AT1s: +0.1%).

Primary market: The subordinated debt primary market reopened in the second half of August, with approximately €4.7bn of total issuance. In the AT1 segment, BNP Paribas issued in USD and in Singapore dollars, while Danske Bank completed a multi-currency transaction in Danish, Norwegian and Swedish kroner. In bank Tier 2, issuers included SEB, KBC, RBI and BFCM in euros; CMC Markets, through its inaugural sterling transaction; and Ringkjøbing Landbobank in Scandinavian currencies. KBC’s issuance was accompanied by a call of an outstanding bond, while RBI issued a green-format transaction. In insurance, Nippon Life and La Mondiale issued euro-denominated Tier 2 capital. Mapfre also announced a potential Tier 2 and senior debt offering to help finance its acquisition of Safety Insurance.

Fundamentals:  Growth in insurance premiums, supported by corporate demand, continued to underpin revenue momentum across markets. Several institutions also raised their 2026 guidance. Key highlights included record results at KBC, which reported €1.7bn of earnings, up 9% year-on-year, and raised guidance across its main business lines; and Commerzbank, which reported €1.8bn, up 40%. BPER and Banco BPM also reported strong results, while Monte dei Paschi delivered its best quarter since the Mediobanca acquisition and raised its 2026 pre-tax profit target to €3.6bn. HSBC and ABN AMRO both upgraded their net interest income guidance. In France, loan volumes, revenues and earnings returned to growth across the banking sector. RoTE exceeded 12% at most banks, except BPCE and Crédit Mutuel. In Canada, the six largest banks reported double-digit earnings growth over the first nine months of 2026.

Outlook

Market Environment

Developments in the Iran conflict and the reopening of the Strait of Hormuz will remain the key market catalyst. A sustained stabilisation in the Iran–Oman situation could allow oil prices to ease further. Conversely, a renewed escalation could quickly increase the energy risk premium and put further upward pressure on bond yields.

The September central-bank and macroeconomic calendar will be particularly busy, with the ECB meeting on September 10, US CPI data on September 11, the FOMC meeting on September 15–16, and the Bank of England meeting on September 17. US inflation data will be especially important. If the figures remain encouraging, the Fed may choose to pause in September rather than raise rates by 25 bps, potentially delaying a further hike until October or December.

In the euro area, gas-price developments will also require close attention, particularly as inventory levels remain low for this point in the year. The ECB is unlikely to move away quickly from its cautious stance, although a pause following the September meeting remains possible. In France, the prospect of a difficult budget vote could weigh on the OAT–Bund spread, independently of changes in ECB policy or German yields. In Japan, the yen is likely to remain influenced by coordinated interventions and, more importantly, by perceptions of fiscal credibility rather than interest-rate differentials alone. Reflecting these concerns, the 10-year JGB yield rose above 3% for the first time in almost 30 years.

In credit markets, the resurgence of geopolitical tensions late in the month only modestly affected spreads, which remained close to July levels. Higher long-term yields continued to weigh on total returns, but the relative resilience of spreads suggests that investors remain broadly constructive on credit fundamentals.

Summer liquidity conditions also limited the scale of market moves, as higher transaction costs discouraged sizeable portfolio reallocations. Carry remains supportive, given higher all-in yields. Primary-market activity and fund flows are expected to recover more meaningfully in September, with a typically busy post-summer issuance calendar. This will need to be monitored closely considering high rates and a dense macroeconomic and political agenda.

Positioning

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

•    Credit: Neutral on investment-grade credit, Euro high-yield, and subordinated debt.

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

•    Sectors: Banks, Telecommunications, Chemicals.

Disclaimer

This document was finalized on September 7, 2026.

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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.

This information is provided for illustrative purposes only and does not constitute a guarantee of future performance under any circumstances. These analyses or descriptions may be subject to interpretation depending on the methods used.

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