June was marked by a relaxation of the geopolitical context in the Middle East, with the announcement of a preliminary agreement between the United States and Iran and the prospect of a gradual reopening of the Strait of Hormuz. Brent crude oil prices fell from $92 to $73, easing inflationary fears and boosting risk appetite. German rates declined, while US rates continued to rise against the backdrop of a still-robust labor market and more hawkish Fed rhetoric. In this environment, European High Yield rose by +0.66%, supported by lower interest rates. By contrast, US High Yield posted a more modest performance of +0.13% (hedged in euros), weighed down by the rise in sovereign bond yields.
High-yield strategy
The month of June was once again dominated by geopolitical developments in the Middle East. After several months of disruptions related to the conflict involving Iran, Israel and the United States, market attention gradually shifted from fears of a prolonged closure of the Strait of Hormuz to the prospect of a negotiated settlement.
The announcement in mid-June of a preliminary agreement between Washington and Tehran, coupled with the prospect of a gradual reopening of the strait, led to a sharp decline in energy prices. Brent oil thus fell from $92 to $73 per barrel over the month, dispelling many concerns about energy inflation and supporting a return of risk appetite, particularly in Europe.
In this context, central banks and rate dynamics remained at the center of investors’ attention. As expected, the ECB raised its key rates by 25 bps while maintaining a data-dependent stance. The sharp decline in oil prices prompted markets to reassess inflationary risks in Europe, supporting a bond rally with German yields declining (-4 bps on the 5-year and -8 bps on the 10-year).
Across the Atlantic, however, the yield curve flattened significantly at the short end (+17 bps on the 2-year and +9 bps on the 5-year), driven by still very strong employment data. This dynamic was amplified following the first FOMC meeting chaired by K. Warsh, during which the Fed left rates unchanged but adopted a more restrictive tone. Labor market resilience, combined with persistent inflation, is clearly shifting the debate within the Fed toward when rates should be raised rather than whether they should be cut.
The improvement in the geopolitical backdrop strongly supported European risk assets during the month. The Stoxx Europe 600 rose by +2.68%, fully benefiting from lower energy prices and declining sovereign yields. Conversely, the S&P 500 fell slightly by -0.95% in local currency terms, penalized by rising US yields and more restrictive monetary policy expectations.
In this environment, High Yield nevertheless delivered positive performance on both sides of the Atlantic. European High Yield rose by +0.66%, supported by the decline in sovereign yields despite a slight widening of spreads (+2 bps). The riskiest segments continued to outperform, reflecting improved risk appetite. In the United States, High Yield posted a more modest gain of +0.13% (euro-hedged), mainly supported by carry, while higher sovereign yields and a slight widening of spreads (+3 bps) limited market performance.
In line with previous months, the rise in sovereign yields since the beginning of the year has provided natural support to the asset class, which continues to offer relatively attractive carry despite tighter risk premia. This environment has generated flows into maturity carry strategies that we were able to invest easily thanks to the dynamic primary market.
Across our other strategies, we arbitrated several recent issues that had performed well in favor of new issues in order to capture the favorable dynamics of the primary market. This active management enables us to maintain a slight underweight in credit risk while preserving a long duration exposure, as yields continue to offer attractive return levels.