September marked a turning point for financial markets. The continued rise in sovereign bond yields, driven by higher-than-expected inflation figures and the resilience of the global economy, pushed rates to new highs, with the US 10-year Treasury yield reaching 5.28% and the German Bund 3.65%, levels not seen for more than fifteen years. Against this backdrop, risk assets began to feel the impact of negative market sentiment. Equity markets ended the month lower, while High Yield credit spreads widened by 41 basis points in Europe and 49 basis points in the United States, resulting in returns of -1.79% and -2.66%, respectively.
Our High Yield Strategy
During September, markets were once again dominated by developments in sovereign bond yields. Volatility remained particularly high and yields reached new record levels. The German 10-year government bond yield rose above 3.65%, a level not seen since 2008, while its US counterpart surpassed the symbolic 5% threshold, reaching a peak of 5.28%, its highest level since 2002. This rise was driven by higher-than-expected inflation figures and the resilience of the global economy. As a result, investors revised their monetary policy expectations, with markets at one point pricing in up to four additional rate hikes by the ECB over the following twelve months. Should such a scenario materialise, the consequences for economic growth could become significant.
In Europe, France's fiscal situation also attracted investors' attention. Concerns over the trajectory of public finances, combined with political uncertainties surrounding the 2027 presidential election, contributed to a marked widening of the spread between French OATs and German Bunds. We discuss this topic in greater detail later in this newsletter.
After several months of resilience, risk assets began to feel the impact of the sharp rise in interest rates. Equity markets ended the month in negative territory, with the S&P 500 declining by 0.35% and the Euro Stoxx 50 by 2.22%.
The High Yield market was not immune to this trend. In Europe, credit spreads, which had previously shown remarkable resilience, widened by 41 basis points, resulting in a return of -1.79% for the High Yield index. In the United States, spreads widened by 49 basis points, leading to a return of -2.66% in local currency terms. Notably, the impact of higher rates and wider credit spreads contributed almost equally to performance. BB-rated bonds were mainly affected by their interest-rate sensitivity, while B and CCC-rated bonds suffered more from deteriorating market sentiment.
From a sector perspective, telecommunications and real estate, both particularly sensitive to interest rates, were among the weakest-performing sectors during the month. The automotive sector also underperformed as fundamentals remained fragile. By contrast, the energy and technology sectors proved more resilient, supported by stronger operating outlooks.
Against this backdrop, we maintained a broadly unchanged positioning. We continue to favour a duration slightly above that of the market, as the recent rise in yields has restored attractive income opportunities. However, we remain cautious on credit risk and maintain spread exposure below market levels. Target-maturity funds now offer particularly attractive yields and, in our view, represent compelling entry points for investors. Finally, we continued to participate in the primary market while remaining highly selective regarding the risk premiums offered by issuers.