August was initially marked by significant tension in interest rates, with the US 5-year Treasury yield rising to 4.5% and the German 5-year Bund yield reaching 3.1%, their highest levels since 2007 and 2008, respectively. This increase was driven by still-solid macroeconomic indicators, persistent concerns about inflation, particularly through energy prices, as well as fiscal concerns. The Federal Reserve also maintained a hawkish stance, reinforcing expectations of a rate hike in September. Against this backdrop of resilient growth, high-yield (HY) markets also posted positive performance, supported by spread tightening on both sides of the Atlantic.
High Yield strategy
During August, markets were once again characterized by significant volatility in sovereign bond yields. Supported by still robust economic data, persistent inflation concerns, and renewed focus on fiscal sustainability issues, US and German 5-year government bond yields reached 4.50% (+5 bps) and 3.10% (+12 bps), respectively, their highest levels since 2007 and 2008. At the Jackson Hole symposium, the Federal Reserve maintained a cautious stance, reinforcing expectations of a potential rate hike at its September meeting.
Despite the rise in sovereign yields, risk assets continued to advance, supported by resilient economic activity and generally solid corporate earnings. Equity markets reached new record highs, as investors continued to focus on companies' earnings momentum rather than the risks associated with a prolonged higher-for-longer rate environment.
The High Yield market also delivered positive returns, with gains of +0.32% for Euro High Yield and +0.86% for Euro-hedged US High Yield. This solid performance was primarily driven by credit spread tightening on both sides of the Atlantic, more pronounced in the United States (-22 bps) than in Europe (-6 bps), which more than offset the negative impact of rising sovereign yields. The limited issuance volume in the primary market, reflecting the summer slowdown, also reinforced supportive technical conditions for credit markets. Primary market activity is, however, expected to accelerate significantly in September, which could place additional pressure on credit spreads.
Low default rates remain a key pillar of market resilience. Default rates were stable at 0.6% in Europe, their lowest level since August 2023, while they declined to 1.7% in the United States. In an environment characterized by resilient growth, contained default activity, and still-attractive carry, the High Yield asset class continues to benefit from solid fundamentals, although the historically low level of credit spreads now limits the potential for further tightening.
From a sector perspective, Technology remains one of the market's key drivers. The sector was among the strongest contributors to performance during August and is expected to remain in focus over the coming months, both because of developments related to artificial intelligence and their implications across the broader economy, and because of the anticipated increase in issuance volumes within the sector.
Despite the remarkable resilience of credit spreads, sources of volatility remain numerous. The current level of sovereign yields is a major area of concern and could eventually exert greater pressure on credit valuations. In addition, geopolitical tensions remain elevated and continue to contribute to market uncertainty.
Against this backdrop of heightened uncertainty and seasonally reduced market liquidity, we did not alter our portfolio positioning. We continue to favor an approach focused on maximizing carry while maintaining a prudent allocation to guard against potential bouts of volatility that may re-emerge over the coming months.