Effective date: 31/08/2026August 2026 was marked by concerns over the evolution of long-term interest rates. The deadlock in negotiations between Iran and the United States, punctuated by sporadic attacks, led to continued volatility in oil prices throughout the month, with Brent crude ending at $89 per barrel. The persistence of high energy prices continued to fuel fears of accelerating inflation and thus weighed on bond markets. In response to this rise in long-term rates, U.S. Treasury Secretary Scott Bessent announced that Treasury purchases of long maturities would be at least doubled for the quarter. Inflation indices published in August, covering the month of July, delivered a mixed message. In the United States, headline inflation (CPI) slowed to 3.4% year-on-year, compared to 3.5% in June, while core inflation fell to 2.5%, its lowest level of the year. In the eurozone, by contrast, inflation accelerated to 2.9% in July, up from 2.8% in June, driven higher by a renewed surge in the energy component (+10.3% year-on-year) linked to developments in oil and gas prices. Core inflation, meanwhile, came in at 2.5%. Business activity surveys remained generally well-oriented despite high energy prices. In the eurozone, the composite PMI rose for the third consecutive month, reaching 52.1 in August, its highest level since November, driven by German industry. In the United States, the ISM manufacturing index jumped to 55.6 in July, its highest level since May 2022, while the ISM services index held steady at 54.1. The July employment report, however, disappointed, with a loss of 23,000 non-farm jobs and significant downward revisions for previous months, even though the unemployment rate fell to 4.1%, a thirteen-month low, due to a further decline in the participation rate.
None of the major central banks held monetary policy meetings in August. The key event of the month from this perspective was the Jackson Hole symposium, where Kevin Warsh was reassuring about the labor market but concerned about the inflation trajectory. For the first time in his term, he provided guidance by stating that the Fed's attention should currently be focused primarily on price stability. In the eurozone, the ECB minutes suggested that a majority of Governing Council members would be prepared to raise key rates in September to contain the effects of rising energy prices.
Bond yields generally increased over the month, particularly at the very end of the month following Kevin Warsh's speech. The U.S. 10-year yield ended the month at 4.74%, its highest level since the start of 2025. The German 10-year yield rose sharply, ending the month at 3.30%, its highest level since 2011, driven by expectations of ECB rate hikes. Sovereign spreads in the eurozone widened slightly.
Euro credit held up well over the month. In Investment Grade, spreads tightened by 1 bp to 76 bps, generating an outperformance of 7 bps versus sovereigns. However, the 12 bp rise in underlying yields to 3.8% led to a total return of -0.2%. The BBB segment and shorter maturities outperformed, while financials underperformed industrials (with Automotive and Telecoms leading). French banks also slightly underperformed in a context of widening OAT spreads. In High Yield, spreads tightened by 10 bps to 255 bps, resulting in an outperformance of 43 bps versus sovereigns and a total return of +0.4%. The BB and single-B segments outperformed CCCs. Finally, the primary market picked up in the third week, with a total of €40.8 billion in gross issuance, confirming the market's strong absorption capacity despite seasonally less favorable liquidity.
In August, the fund's performance was impacted by the sharp rise in rates, which was nevertheless offset by carry, resulting in a net performance of 0.16% (I share). We remain confident in the asset class and maintain rate and credit sensitivities at the upper bounds of the fund, at 0.46 and 0.93, respectively.
The primary market picked up significantly in the second half of the month, allowing the fund to participate in the Volvo, ABN, and CTP (3Y) issues. We favor securities with 2-3 year maturities given the particularly attractive carry due to high rates in this segment. The fund's overall ESG rating remains "C".