Strategy Focus - Renewed bond market tensions

Bond yields have increased again since the beginning of September with most topping their 2008 Great Financial Crisis peaks. The reasons for this increase are fourfold: (i) the United States economy continues to power along with surprising strength, (ii) the rise in oil prices has raised fears of a fresh bout of inflation, (iii) central banks continue to strike a hawkish tone, and (iv) budget discussions are reviving fears for the sustainability of public debt in several countries. 10-year sovereign yields have risen to near 4.8% in the United States, 3% in Germany and 3.5% in France. The rise has been less marked in the UK where already high yields remain close to 4.6%. Pressure has been particularly fierce on Italian bonds, now trading at a near 200 bp spread to the German bund.

We stand by our central scenario of resilient but weaker economy. Companies and households still have the cash to mitigate, at least in part, the latest tightening of monetary and financial conditions. Meanwhile, persistently strong labour markets and an easing of inflation will help sustain household purchasing power. But we see some risk of a tighter fiscal stance, particularly in the euro zone, which could weigh on economic growth. Moreover, the surge in bond yields also raises the risk of financial instability, as seen in the United Kingdom a year ago or with US regional banks in March.

We remain confident in our strategic balance between equities and fixed income. The latest bond market tensions have been accompanied by a fall in equity markets and a depreciation of the euro against the dollar. As it stands, we stick to our highly diversified positioning in order to be protected against these turbulences. That said, we remain highly vigilant, and ready to react to any changes in the situation.

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