Markets delivered mixed performances in October. Concerns over hyperscalers’ capital expenditure on AI development, renewed pressure on French sovereign debt and geopolitical tensions triggered a flight to quality. As a result, sovereign yields fell sharply in both the United States, with the 5-year yield down 37 bps, and Germany, where it declined by 23 bps. This rally occurred despite the continued surge in oil prices, which rose by 14% over the month and 30% over two months, as well as persistent inflationary pressures. Euro High Yield fell by 1.0%, as spreads widened by 55 bps. By contrast, US High Yield gained 0.29% in local-currency terms, benefiting from the sharper decline in interest rates and a more moderate 29-bp widening in spreads. Decompression was most pronounced in the riskiest segments, with the European B/BB spread differential returning to an attractive 241 bps, close to its 2022 levels.
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Throughout October, markets delivered mixed performances, both across asset classes and geographical regions. A flight to quality, driven by concerns over hyperscalers’ capital expenditure on AI development, tensions surrounding French sovereign debt and geopolitical uncertainty, led to a sharp decline in sovereign yields. The move was more pronounced in the United States, where the 5-year yield fell by 37 basis points, while its German equivalent declined by 23 basis points. This came after several months of sharply rising yields and despite a further increase in oil prices, which rose by 14% over the month and 30% over two months, remaining above $100 per barrel. French sovereign debt remained under close scrutiny. The spread between the 10-year French OAT and the German Bund reached a peak of 175 basis points before tightening after Moody’s decided not to downgrade France’s credit rating. Nevertheless, at around 165 basis points, the spread remains close to its historical highs. Investors continue to closely monitor the adoption of the budget and upcoming political developments. This lack of confidence also spread to the credit market, weighing on certain French issuers.
Risk assets delivered a more negative performance overall. Equity markets declined in both Europe, with the Euro Stoxx 50 down 2.06%, and the United States, where the S&P 500 fell by 0.87% in local-currency terms. In the High Yield market, although lower interest rates provided significant support, inflationary pressures, rising energy prices and concerns over the profitability of AI-related investment continued to weigh on the most speculative segments. High Yield markets therefore followed divergent paths across the two regions. In Europe, the High Yield index returned -1.0%, as it was adversely affected by a sharp widening in risk premiums. Spreads widened by 55 basis points to 355 basis points. In the United States, the market proved more resilient, returning +0.29% in local-currency terms despite spreads widening by 31 basis points to 341 basis points. The steep decline in sovereign yields therefore partly offset the deterioration in credit sentiment.
These developments were accompanied by marked spread decompression. The riskiest bonds, particularly CCC-rated securities, experienced significantly greater spread widening than the BB segment. This trend was similar on both sides of the Atlantic. The spread differential between B- and BB-rated bonds has become attractive at 241 basis points, returning to levels last seen in 2022.
From a sector perspective, Telecommunications once again ranked among the worst-performing sectors in both Europe and the United States. Investors remained concerned about the indebtedness of certain companies, the intensity of competition and their long-term growth prospects. In Europe, the Financials sector also came under pressure, particularly due to the continued weakness of several real estate issuers that remain heavily dependent on refinancing conditions. By contrast, the Energy sector held up well in both Europe and the United States, supported by higher commodity prices and solid fundamentals.
Following the significant widening in risk premiums, primary market activity slowed sharply over the month, declining by 38% in Europe and 72% in the United States. Flows into the asset class stabilised, supported by yields that remain elevated.
This environment of heightened volatility and increasing dispersion is creating new opportunities for High Yield managers. We have taken advantage of current yield levels to add to selected positions in our fixed-maturity funds. Issuer selection remains essential, with a preference for companies with solid fundamentals and clear visibility on their refinancing prospects.