Market Environment
In May, trade de-escalation continued with an agreement between China and the United States. However, Moody's downgrading of the US rating to Aa1 added to the upward pressure on US yields. The month of May was a mixed test for long-dated sovereign debt issues, with demand in sharp decline reflecting investor caution in the face of government deficits and public debt management in certain countries. Under pressure, yields on US and Japanese 30-year bonds reached 5.15% and 3.20% respectively, before stabilizing. At the end of the month, the announcement of US tariffs of 50% on European products had a limited impact on fixed-income markets, the measure having been postponed until July 9 following discussions.
Rates and performance
The performance of the global sovereign debt market was negative in May (-0.71%), helped by the slightly positive performance of eurozone debt (+0.13%), while the US sovereign market delivered a negative performance (-0.90%). The German two-year yield tightened by 9 bps to 1.78%, while the 2-year/10-year curve flattened by 3 bps. Within the eurozone, yield spreads contracted slightly. The 10-year OAT-Bund spread eased by 3 bps, and Italian bonds outperformed German debt by around 10 bps. The two-year US bond yield rose by 29 bps to 3.90%, while the ten-year yield rebounded by 24 bps to 4.40%. The year-to-date performance of the global sovereign debt market, hedged in euro, was positive (+0.77%).
Central banks
The ECB did not hold a meeting in May, but cut rates by a further 25 bps on June 5. The Fed continued to keep rates unchanged in a range between 4.25% and 4.50%, underlining the risks of rising unemployment and a rebound in inflation. The Bank of Japan held rates steady at 0.5% in May due to high uncertainty over trade negotiations, and lowered its growth and inflation expectations for 2025 and 2026. Meanwhile, the Bank of England (BoE) and the Reserve Bank of Australia (RBA) cut their key rates by 25 bps to 4.25% and 3.85% respectively, in response to reduced inflationary pressures. As of June 10, investors were factoring in rate cuts of around 50 bps for the Fed and 25 bps for the ECB between now and the end of the year.
Corporate Investment Grade
Performance and spreads: Credit spreads tightened in May (-11 bps on Seniors and -15 bps on Hybrids) as trade disputes eased. The IG segment posted a slightly positive performance for the month, at +0.44%, thanks to spread tightening and carry.
Primary market: May set a new record for corporate investment-grade bond issuance, with around €63 billion raised. Demand was strong, as order books were, on average, oversubscribed 3 times, underscoring the market's depth and resilience. Notably, green bonds made up 17% of the total issuance, with Volkswagen and Iberdrola in particular. The hybrid segment was also dynamic, with issues from EDP, Arkema, Volkswagen and Südzucker.
Sectors: All sectors tightened, with automotive, real estate and media outperforming, retracing most of their April divergence. Conversely, healthcare and consumer goods underperformed.
Fundamentals: The Q1 2025 earnings season continued, broadly in line with expectations. On the ratings front, Fitch raised Airbus' rating by one notch to A. Moody's also upgraded Sanofi's rating from A1 to Aa3. Conversely, the agency downgraded Stellantis by one notch to Baa2. Südzucker was also downgraded by S&P to BBB- due to a sharp decline in EBITDA and broader challenges in the sugar market. In addition, following S&P and Moody's, Fitch downgraded Whirlpool's rating to HY.
Corporate High Yield
Performance and spreads: The asset class gained +1.35% in May, driven by a sharp tightening of risk premiums (-51 bps) and carry. Meanwhile, sovereign yields faced mild upward pressure (+8 bps on Germany's 5-year bond). All rating compartments were up, with B ratings outperforming.
Primary market: The primary market was very active, with nearly €16 billion in new issuances—a record volume and the second-highest month for new issues after October 2024. This supply was met with strong demand from investors.
Sectors: All sectors posted gains in May. The energy sector (Pemex, Consolidated Energy) was the best performer, thanks to the rebound in oil prices, followed by the real estate sector (Foncia, Branicks), which benefited from the upturn in property transactions. The automotive sector (Antolin, Forvia) also performed well, supported by the anticipated reduction in tariffs on automotive parts destined for assembly in vehicles manufactured in the United States.
Fundamentals: The telecommunications sector has seen several strategic developments, including numerous planned acquisitions and asset sales. In the satellite segment, Eutelsat is reportedly aiming to raise over €1.5 billion, which would double the French government's stake. On the ratings front, there were several upward revisions in the leisure sector. Several positive moves were also made in the healthcare sector. On the other hand, there were still some unfavorable moves in the automotive sector. In particular, S&P and Moody's have downgraded the outlook for Volvo Car from stable to negative.
Corporate High Yield
Performance and spreads: Bank spreads tightened in May: -14 bps on Senior, -20 bps on Tier 2, and -41 bps on AT1 (-30 bps AT1€). Insurers experienced a tightening of -11 bps on Senior and -21 bps on Subordinated debt. This translated into a positive performance across the entire capital structure: +0.5% for Seniors, +0.7% for Tier 2s, +1.6% for AT1s (+1.7% for AT1€), and +0.4% and +1.1% respectively for insurers Senior and Subordinated Notes.
Primary market: Against this backdrop, the primary market was particularly active with the end of the earnings season and saw strong demand.
Fundamentals: First-quarter 2025 earnings for European financial institutions remained excellent for both banks and insurers, with RoTEs averaging between 10% and 16%. At this stage, forecasts remain unaffected by customs duties. On the M&A front, Santander rejected NatWest's bid for its UK retail bank, while Erste Bank acquired a 49% stake in Santander Bank Polska. In the UK, Chesnara is considering the acquisition of HSBC UK's life insurance business, and Crédit Agricole has taken a 9.9% stake in Belgian bank Crelan. In Iceland, Kvika banki received indications of interest from Arion Banki and Islandbanki, and UniCredit increased its stake in Alpha Bank to around 20%. Rating agencies continued to upgrade ratings: Moody's upgraded Bank of Cyprus to A3, BCP to A2, Novo Banco to Baa1, Monte dei Paschi to Baa1. Fitch upgraded Bank of Ireland to A- and Permanent TSB to BBB, Bank Millennium to BBB-, while placing Mediobanca's rating under review.
Outlook
Market Environment
- In May, the sovereign bond market reflected renewed optimism around easing trade tensions. However, investors remained cautious about the very long-maturity bonds issued by certain governments.
- In the United States, the tax bill and its impact on deficit management do not seem to be reassuring investors at this stage. A term premium is therefore likely to persist over the coming weeks and months. It will be crucial for the US Treasury to ensure its ability to place long-dated issues at a price that limits the rise in the cost of debt.
- In Japan, two long-dated bond issuances disappointed, leading investors to speculate about a potential intervention by the Bank of Japan, though this appears unlikely. A more plausible scenario is a reduction in the Treasury's issuance program for long-dated bonds, given the ongoing lack of demand.
- This mistrust extends beyond the United States and Japan, and a strong steepening of the curves has also been observed in the eurozone. Although the overall steepening of the yield curves is set to continue, it seems that the eurozone is benefiting from greater support for these long-dated bonds, with the ECB set to continue cutting rates in the months ahead.
- Since the end of April, inflows into credit asset classes have been consistently positive, and we expect this trend to persist. Fundamentals remain strong, supporting a constructive outlook on the credit market overall. While yields remain attractive, credit spreads are relatively tight. In this environment, we continue to favor short- and intermediate-term 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.
