Market Environment
During the summer, US and European interest rates started to diverge. In the US, short-term rates dropped due to clear signs of a weakening job market, including fewer new jobs being created and an increase in the unemployment rate to 4.3%. These developments led Jerome Powell to open the door to a possible rate cut during the Jackson Hole symposium at the end of August.
In the Eurozone, rates went up during the summer. Business surveys showed a slight rebound, indicating that short-term economic activity is stabilizing. Meanwhile, headline inflation held steady at 2%, and core inflation remained at 2.3%. These factors allowed the ECB to keep its rates unchanged, with Christine Lagarde stating that the current rate levels were appropriate, ruling out any chance of a cut at the September meeting. In France, political instability dampened the renewed risk appetite seen over the summer. After sovereign spreads had narrowed—the 10-year Italy/Germany spread reached 75 bps and the OAT-Bund spread dropped to 65 bps—they widened again, especially between France and Germany.
Trends and performance
The overall performance of the euro-denominated sovereign debt market was negative this summer (-0.34%), while the performance of US debt (+0.95%) was helped by the easing of short-term rates. The European sovereign bond market delivered a negative performance (-0.66%), penalized by a rise in rates and widening spreads. The year-to-date performance of the overall euro-denominated sovereign debt market is still positive at +0.97%.
Central Bank Focus
In his speech at Jackson Hole, Jerome Powell opened the door to a rate cut while defending the independence of the Federal Reserve. The institution now seems more concerned about the risks of a deterioration in the labor market and a rise in unemployment than about inflation. In the Eurozone, several ECB members emphasized that the institution was comfortable with the current level of rates, ruling out the possibility of a cut in September. The BoE lowered its key rate for the fifth time in a year to 4%: five members voted for a cut and four for the status quo.
Corporate Investment Grade
Performance and spreads: Credit spreads widened in August, with senior debt increasing by 5 bps and hybrid debt by 13 bps, driven by market volatility and modest upward pressure on German 10-year yields. Despite this, the asset class delivered stable performance for the month, as carry income offset the negative impact of rising yields and wider spreads.
Primary market: Supply was strong, with around €17bn issued, mostly in the last week of the month, and well absorbed with order books oversubscribed more than three times on average. Green bonds accounted for around 18% of issues, notably including E.ON's double tranche for €1.1 billion. Schneider Electric presented a quadruple tranche totaling €3.5bn. In the hybrid segment, Japan Tobacco issued a €500 million 30NC5.5 bond at 3.875%, which was oversubscribed 15.8 times.
Sectors: All sectors faced pressure from rising interest rates, except for real estate, which is outperforming. Conversely, the leisure (+11 bps), automotive, telecoms, and technology sectors are underperforming.
Fundamentals: Q2 earnings reports were generally in line with expectations, although trends varied by sector. In utilities, Orsted announced a significant €8 billion capital increase. The Revolution Wind project was halted by a work stoppage order from the US administration when it was 80% complete. On the M&A front, Keurig Dr Pepper (KDP) announced the acquisition of JDE Peet's for €15.7bn. Following the transaction, KDP plans to split into two entities listed in the US: 'Beverage Co,' which will include Dr Pepper, and 'Global Coffee Co,' which will encompass JDE Peet's and Keurig. S&P and Moody's confirmed JDE Peet's ratings (BBB-/Baa3), but Fitch placed its BBB rating on negative watch.
Corporate High Yield
Performance and spreads: The asset class held steady in August (+0.1%), as carry and a slight decline in German 5-year yields (-4 bps) offset the late-month widening of spreads (+10 bps), driven primarily by political developments in France. Performance across ratings was largely uniform, except for CCC-rated credits, which underperformed due to idiosyncratic factors.
Primary market: After record activity in recent months, the primary market slowed down with only €2 billion in new issues in August.
Sectors: Media (Telecolumbus, Warner Bros), automotive (Antolin, Benteler) and real estate (Branicks, Foncia, Medical Properties) led the way in August, while basic industry (Kem One, Victoria Plc) and healthcare (Cerba, Biogroup) lagged behind.
Fundamentals: Second-quarter results were mixed, particularly in the chemicals and retail sectors. The construction sector seems to have hit a turning point, suggesting that its outlook may only improve moving forward. In the automotive sector, results were surprisingly positive, while the infrastructure sector is expected to continue to grow thanks to data centers. M&A activity remained active: discussions continued on the sale of SFR, while Telefonica is reportedly preparing a capital increase to expand its scope, with Zegona or Virgin Media as potential targets. On the rating front, downgrades dominated. Urbaser was downgraded by all rating agencies to B1/B+, OI Glass to B+ by Moody's, Graanul to Caa1, Auchan to negative outlook by S&P, Worldline to BB, Merlin and Green Bidco to CCC+ by S&P, and Pfleiderer to CCC+ by Fitch, which also downgraded Celanese to BB+. On the other hand, there were positive developments for Saipem, Canpack, and Ceconomy.
Financial Debt
Performance and spreads: Over the month, bank spreads widened slightly: +7 bps on Seniors, +12 bps on Tier 2 and +2 bps on AT1s (+1 bp for €AT1s). Insurers saw a widening of +8 bps on Seniors and +4 bps on Subordinated debt. In terms of performance, Senior and Tier 2 bank bonds were broadly stable, while AT1 bonds rose slightly to +0.5% (+0.3% for €AT1s). Insurers rose by +0.2% for both Senior and Subordinated bonds.
Primary market: The primary market was active with several Tier 2 issues (Danske Bank, Swedbank, ING, Erste, KBC), as well as a few AT1 issues and Allianz's RT1, which recorded the lowest spread reset ever achieved for this type of debt in Europe.
Fundamentals: Half-year results confirmed the sector's momentum. Major European banks generally maintained high profit levels and double-digit RoE (Banco BPM +31% Y/Y, BPER +30%). Several regional institutions (Optima, Sondrio, Cajamar) posted record results for the half-year. However, some German banks (Grenke, PBB) were penalized. Insurance companies posted solid results overall, with strong profit growth for Allianz (+9.5%), L&G (+42%), Admiral (+69%) and Talanx (+26%). M&A activity remained strong. BBVA confirmed its bid for Sabadell, despite opposition from the Spanish authorities. Mediobanca failed to secure the takeover of Banca Generali, paving the way for Monte dei Paschi. Swedbank strengthened its position in consumer credit and payments in Scandinavia by acquiring Barclays' stake in Entercard. On the ratings front, Moody's downgraded Austria's outlook to negative due to concerns about its public debt. Conversely, Portugal saw its rating raised one notch by S&P to A+ thanks to its solid trajectory.
Outlook
Market Environment
- US statistics show a slowdown in the job market and in wages, which could weigh on growth in the medium term. These factors therefore support the view that the Federal Reserve may resume its rate cuts, with a 25-bps cut expected at its next meeting on September 17.
- On the other hand, the Federal Reserve will have to take several factors into account. The US president's immigration policy may impact the labor market, and the tariffs that have been put in place are likely to gradually generate more inflation. The pace of the Fed's rate cuts may therefore not be linear in the next quarters.
- In the Eurozone, recent data indicate solid growth and improved clarity for businesses. Inflation remains within the ECB's target range. In this context, the ECB is unlikely to cut rates at its September meeting. However, there is still some limited potential for rates to decrease, influenced by US sovereign rates. Regarding French debt, uncertainty will persist in the coming weeks. The next government's ability to reduce the deficit will be limited, which is likely to be reflected in the OAT/Bund spreads. French public finances will remain a key concern in the last quarter of 2025, as rating agency reviews could trigger volatility.
- On the credit side, fundamentals remain strong, with default rates expected to fall over the next year. The primary market remains active, with issues still oversubscribed, reflecting continued strong investor appetite. Although credit risk premiums remain tight, the recent rise in interest rates makes this asset class still attractive.
- Against the backdrop of a deteriorating US economy, we favor European credit over US credit, particularly in the high-yield segment.
Positioning
- Duration/Interest 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.
