May was marked by significant uncertainty surrounding discussions on a potential memorandum of understanding between the United States and Iran, leading to notable volatility in oil prices (−19% for the month, with fluctuations of around ±15%). This environment reignited fears of stagflation, pushing sovereign yields to levels not seen in several years. Despite the lack of a signed agreement, expectations of a favorable outcome nevertheless prevailed, supporting the performance of risky assets: risk premiums narrowed, and high-yield euro bonds (HYE) outperformed (+1.05%) thanks to lower rates (−11 bp), while high-yield bonds in dollars (HYS), up +0.34%, remained weighed down by rising rates (+14 bp).
High-yield strategy
Ongoing geopolitical tensions in the Middle East continued to drive market trends in May, with renewed volatility in oil prices (-19% for the month, with swings of +/-15%), fueled successively by hopes, then fears, before hopes returned for some form of resolution to the blockade of the Strait of Hormuz. Increased uncertainty surrounding the negotiations in the middle of the month pushed Brent crude up to $113 per barrel, contributing to a sharp correction in yields, with sovereign bond yields reaching multi-year highs as markets priced in a scenario of more persistent inflation that could lead to a risk of stagflation.
U.S. macroeconomic data has helped fuel fears of stagflation, starting with the strength of the labor market (payrolls >100k for two months), which, combined with inflation data exceeding expectations (+3.7% year-over-year), created fertile ground for a rate shock in the middle of the month, just as persistent tensions over the reopening of the Strait of Hormuz had reached a peak. Indeed, investors were therefore anticipating a scenario of persistently high oil prices for the remainder of the year, reinforcing the “higher for longer” narrative.However, the subsequent decline in oil prices toward the end of the period, amid hopes for a memorandum of understanding between the United States and Iran, helped ease these inflationary expectations and stabilize the markets. In this context, the Fed minutes revealed that a majority of officials warned they would likely need to consider raising rates if inflation remained persistently above 2%. Many called for abandoning the “accommodative” stance altogether. For its part, the ECB moved toward a rate hike in June, with the debate focusing on the magnitude of the hike and the need for further tightening thereafter.
Despite the volatility, market sentiment turned around at the end of the month, and in the absence of any signed agreement, hopes for a resolution prevailed and allowed risky assets to perform well. The rally that began in April thus continued: the S&P 500 rose by +5.26% (in local currency), hitting a new all-time high of 7,580 points, while the Stoxx Europe 600 also posted a solid gain of +3.20%.In this environment, High Yield delivered a solid performance supported by narrowing risk premiums (-12 bps HY€, -11 bps HY$). Europe’s outperformance (+1.05%) relative to the U.S. market (+0.48% in $) was driven by a sharp easing in yields (-11 bps on the 5-year German bond), despite the extreme tension observed mid-month, when yields weighed on the U.S. market (+14 bps on the 5-year U.S. bond).
The rise in sovereign bond yields since the start of the year continues to support the asset class’s overall return, despite the narrowing of risk premiums. We believe the current environment remains favorable for a carry strategy. We have therefore taken advantage of the primary market and opportunities in the secondary market to continue diversifying the portfolios of our term funds.Regarding open-end funds, we also participated in new issuances and slightly increased credit risk exposure during the month to capitalize on strong market momentum, while maintaining a long duration exposure to benefit from persistently high interest rates.