Fixed Income Newsletter - July 2026

Market Environment

June 2026 was marked by the announcement of a memorandum of understanding between the United States and Iran. Markets welcomed the prospect of the Strait of Hormuz reopening, which had an immediate impact on energy prices. The price of Brent crude continued to decline, hovering around $70 per barrel. This sharp easing led to downward revisions in central banks’ interest rate forecasts.

In the United States, the Federal Reserve kept its benchmark interest rates unchanged within the [3.50%–3.75%] range, in line with expectations. Half of the FOMC’s voting members anticipate at least one rate hike in 2026, with six expecting two or more hikes, marking a “hawkish” shift. The new projections reflect persistent inflationary pressures, and rates have adjusted upward over the month: +17 bps for the two-year rate. Kevin Warsh’s first appearance as chair was marked by a resolute stance on the fight against inflation, with a firm commitment to defending price stability. On the macroeconomic front, economic activity remains broadly resilient, and the release of May’s PCE inflation data was generally reassuring and in line with expectations.

In the Eurozone, the German two-year yield remained stable at 2.53%, and the ten-year yield fell back below 3% to 2.88%. Core inflation for May rose to 2.6%. The ECB raised its key interest rates by 25 basis points, bringing the deposit rate to 2.25%. This move confirms the ECB’s commitment to combating inflation. The central bank also raised its inflation forecasts to 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. The ECB will remain highly dependent on developments in the conflict and economic data. Sovereign spreads widened over the month, reaching 79 bps for the OAT-Bund spread and 77 bps for the 10-year BTPS-Bund spread.

In the United Kingdom, sovereign yields also declined (by an average of -6 bps across the curve). The Bank of England kept its policy rate unchanged, a decision that was largely in line with consensus (7 members opposed, 2 in favor of a hike) and consistent with market expectations. The release, just before the decision, of data showing that private-sector wage growth remained on a downward trend (+2.8% year-over-year in April) reinforced this status quo. The resignation of current Prime Minister Keir Starmer, paving the way for Andy Burnham, was generally well received in the fixed-income markets, but investors will now have to focus on the future government’s fiscal credibility.

In Japan, the Bank of Japan raised its key interest rates by 25 bps to 1%, the highest level since 1995. The BoJ also announced on Tuesday that it would continue the gradual reduction of its Japanese government bond purchase program through April 2027, but assured that it would stabilize its monthly purchase volume after that date.

The overall euro-denominated sovereign debt market posted a positive return in June (+0.26%), bringing the year-to-date return to -0.10%. 

Corporate Investment Grade

Performance and Spreads: Credit spreads remained broadly stable despite volatile rates. The asset class posted a positive return of +0.50%, driven by easing rates and carry.

Primary Market: Primary market activity remained robust, with approximately €47 billion issued during the month, bringing the total issuance volume for the first half of the year to €263 billion. The most notable transaction was the five-tranche issuance by NTT Finance Corp, a Japanese telecommunications group, totaling approximately €4 billion. The automotive and utilities sectors dominated the supply side. The hybrid segment was also active, with Orange issuing its first euro-denominated hybrid of the year (€850M, NC7, 4.375% yield). This offering was well received, with order books oversubscribed by an average of 3.2x.

Sectors: Most sectors are stable. Real estate and utilities are outperforming amid easing interest rates. Conversely, the automotive and energy sectors are significantly underperforming, notably weighed down by unfavorable news.

Fundamentals: In the auto sector, BMW issued its third earnings warning in two years, due to the accelerating deterioration of the Chinese market and pressures related to the conflict in the Middle East. Meanwhile, Volkswagen announced a major cost-cutting plan totaling €11 billion by 2030, involving a 15% reduction in its workforce and the closure of four plants in Germany, while cutting its investments by 15% over five years to €130 billion. On a more positive note, Stellantis reported a 5% increase in sales for the first half of the year in the United States, confirming strong sales momentum in the region, which is essential to the recovery of its profitability. As for the rating agencies, following BMW’s profit warning, Moody’s maintained its A2 rating but lowered the outlook to negative. Fitch upgraded Deutsche Telekom to A- and Accor to BBB, citing improved financial fundamentals.

Corporate High Yield

Performance and Spreads: European high yield continued its strong momentum in June with a return of +0.68%, bringing the second-quarter return to +3.63% and the first-semester return to +1.93%. This performance was supported by the continued narrowing of spreads (-10 bps in June and -91 bps for the quarter). Five-year yields also continued to ease, falling by 4 bps over the month. Against this backdrop, the riskiest segments continued to outperform. CCCs posted a return of +1.20% for the month, while Bs (+0.82%) outperformed BBs (+0.56%).

Primary Market: The primary market remained particularly active, with €17.7 billion in new issuances. Since the start of the year, volumes have risen by +12.7% compared to the same period last year, with the majority still focused on refinancing.

Sectors: All sectors posted positive returns. The strongest performers were in the capital goods sector (Innomotics, Toucan, Fedrigoni), the transportation sector (Air Baltic, Mobico), and the leisure sector, thanks to the agreement reached by Intralot to acquire Evoke. Conversely, the telecommunications (Virgin Media O2, Altice) and energy (Consolidated Energy, Ithaca) sectors are underperforming, with the energy sector being hurt by falling oil prices.

Fundamentals: Virgin Media O2 has suffered from investor concerns regarding increased competition in the UK broadband market and uncertainties surrounding the acquisition of Netomnia. On the rating front, Moody’s revised SFR’s outlook to positive. The same agency upgraded Iliad’s rating to Ba2 due to improved credit metrics, as well as the acquisition of SFR, which is expected to further increase its scale. S&P upgraded Mahle’s outlook to positive, thanks to improved profitability and a debt reduction trajectory. Conversely, Fitch downgraded Emeria to CCC+, citing increased refinancing risk and lackluster operating performance. S&P downgraded Antolin’s rating to CCC- due to a proposed debt restructuring considered a distressed debt exchange.

Financial Debt

Performance and spreads: Spreads tightened modestly across bank senior and Tier 2 bonds (both by 1 bp), while AT1 spreads compressed by 13 bps (€ AT1: 14 bps). In the insurance sector, senior spreads tightened by 2 bps and subordinated spreads by 6 bps. In terms of performance, bank senior bonds returned +0.4%, Tier 2 bonds +0.5%, and AT1 bonds +0.7% (€ AT1: +1.1%). Insurance senior bonds delivered +0.5%, while subordinated insurance bonds gained +0.9%.

Primary Market: The primary market was active during the month, with a subordinated bond issuance volume of approximately €8 billion. In the AT1 segment, there were four euro-denominated issues and one dollar-denominated issue. In the insurance sector, we saw three RT1 issues (Crédit Agricole Assurances, BNP Cardif, and Legal & General). In Tier 2, OTP Bank carried out the largest euro-denominated subordinated issuance ever conducted by a bank in the CEE region. There were about ten euro-denominated issuances (including Mapfre, Crédit Mutuel Arkéa, and Nordea) and two in British pounds (Starling and Just Group).

Fundamentals: The EBA published a report on simplifying the European prudential framework, recommending that P2R/P2G remain unchanged and that the CCyB and SyRB be merged, while explicitly ruling out any removal of AT1 from the capital structure. Finally, at the Sintra Forum, the ECB raised the possibility of doubling the minimum reserve requirement (from 1% to 2% of certain liabilities), a decision that would further penalize German and French banks in absolute terms, and Italian, Spanish, and Portuguese banks as a percentage of excess liquidity. On the M&A front, Banco BPM proposed a merger with Monte dei Paschi in response to a competing offer from Intesa Sanpaolo, which plans to sell the MPS to Unipol. Regarding UniCredit-Commerzbank, UniCredit’s stake rose throughout the month to exceed 42%, with CEO Andrea Orcel now considering a takeover more likely than not, despite opposition from Commerzbank’s management and the German Federal Financial Supervisory Authority.

Outlook

Market Environment

The memorandum of understanding signed between Washington and Tehran marked a turning point in June. Despite Donald Trump’s repeated claims of victory, certain issues remain unresolved, particularly regarding military stockpiles and the nuclear program. So not everything has been settled, but the worst-case scenario is receding; geopolitical risk premiums are easing; several oil producers are announcing production increases; and maritime traffic is resuming in the Strait. Investors will now be able to refocus on concerns about AI bubbles, private credit, and a potential resurgence of the trade war. The central bank panel in Sintra reinforced the view that any further rate hikes by the Fed, the ECB, or the BoE appear increasingly unlikely. In this context, the short end of the yield curves still appears attractive to us. Yield curve steepening strategies could regain traction under these conditions. This is especially true as the upward pressure currently affecting Japanese rates raises the risk of a second-round effect on long-term European and U.S. debt. Accommodative central banks, ample system liquidity, supportive seasonality, and the absence of extreme market positioning continue to support carry trades and risk assets.

In credit markets, the historically tight level of spreads leaves the asset class vulnerable to adverse shocks, whether from renewed geopolitical tensions or a sharper-than-expected economic slowdown. Carry remains supportive, underpinned by still-elevated absolute yield levels that continue to attract investors to the asset class.

Several sources of uncertainty nonetheless persist, including the outcome of the nuclear negotiations within the 60-day timeframe, developments surrounding the Lebanese dimension of the ceasefire, and the still only partial normalization of oil flows. The upcoming second-quarter earnings season will also be closely monitored to gauge the impact of the conflict in Iran across sectors and issuers.

Particular attention will be paid to the technology sector, as markets remain focused on potential signs of slowing AI-related capital expenditure growth and on the pace of effective AI monetization. Finally, inflows into both the high-yield (HY) and investment-grade (IG) segments remain supportive, against the backdrop of a primary market expected to slow seasonally in July.

Positioning

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

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

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

• Sectors: Banks, Telecoms, Real Estate, Chemicals.

Disclaimer

This document was finalized on July 8, 2026.

This document is intended for professional clients as defined by the MiFID Directive.

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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