Short-Term Bonds Widen the Gap Against Money Market

Chart of the week

Since the beginning of the year, the ECB has cut its key interest rates four times, bringing its deposit rate down to 2%, compared with 3% at the end of 2024. Reflecting these adjustments, the €STR -which serves as the key money market benchmark – has returned to 1.9% and could continue to fall: the market is still anticipating a final rate cut by the ECB before the end of the year.

Meanwhile, other moderate-risk options continue to deliver steady returns in the fixed income markets. As of July 18, short-term high yield bonds, represented by the ICE BofA 1-3 Year Euro High Yield Constrained Index, offer a yield-to-maturity of approximately 5% per annum. This yield advantage has allowed the index to consistently outperform money market instruments over the long run.

Our analysis

Short-term high yield bonds are naturally more volatile than money market instruments and the short-­term investment-grade segment. However, they exhibit lower volatility compared to the overall high yield market, offering a relatively conservative approach to fixed income investing. This is paired with yields-to-maturity that currently stand well above inflation.

Moreover, it is worth noting that since 2007, declines in this market segment – typically linked to periods of market stress (e.g., 2008, 2011, 2020, and 2022) – have almost always been fully recovered within just one year.