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- July was dominated by renewed geopolitical tension, higher bond yields and a pullback in enthusiasm for artificial intelligence. The US-Iran conflict re-escalated after the previous month’s tentative progress broke down, disrupting traffic through the Strait of Hormuz and pushing Brent crude briefly above $100 per barrel. Although oil retreated to around $90 by month-end, it still rose 24% over July, reviving concerns around inflation and the outlook for monetary policy.
- Government bond markets sold off sharply across all major regions. Central banks generally left policy rates unchanged, but their guidance diverged. The new Fed Chair offered little guidance on the future path of policy, unsettling markets and driving a sharp steepening of the US curve – the 30-year Treasury yield touched 5.27%, its highest since 2008. The ECB and Bank of Japan adopted a more hawkish tone, while the Bank of England struck a more dovish note, with Governor Bailey pushing back on the idea the Bank was “edging towards a hike”. Despite these differences, 10-year yields rose materially, including 35bps in Germany and France, 29bps in the UK and 27bps in the US.
- Japan drew particular attention late in the month, as the Japanese Ministry of Finance and US Treasury jointly intervened to support the yen after it hit a 40-year low of ¥163.9/USD. The currency rebounded to finish as the best-performing in the G7, up 3.2% against the dollar.
- Equity performance varied significantly by region and sector. A reassessment of AI-related valuations drove the Philadelphia Semiconductor Index 21% lower and pulled the Nasdaq 100 down 6.6%. South Korea was particularly weak, with the KOSPI falling 23.6%, while the broader S&P 500 was broadly flat as strength outside technology offset much of the decline. European equities proved more resilient, with the Euro Stoxx 50 gaining 0.6% and the FTSE 100 rising 3.6%.
- Credit markets reflected the same regional divide. US investment-grade spreads widened 4bps, weighed down by the large technology “hyperscalers” that dominate the US index and continued to issue heavily. European spreads tightened by 1bp, supported by more limited issuance and strong investor cash balances.
- US primary markets remained busy, with $147bn of investment-grade issuance taking year-to-date supply roughly 35% ahead of last year. The standout was Amazon’s $25bn eight-tranche deal – yet demand was notably softer than for similar mega-deals in June, with order books just 1.6x covered versus 3x previously, an early sign that investor appetite for AI-related supply is no longer unconditional. US banks also returned to the market following their earnings results.
- Financial issuance in the US continued to provide selective value. We participated in transactions from MUFG, Goldman Sachs, JPMorgan and Morgan Stanley, where pricing generally offered modest concessions to our fair-value estimates. Several of these bonds performed well after launch, particularly where improving secondary market conditions provided an additional tailwind.
- European issuance slowed materially during the summer period, with only €34bn of investment-grade supply. Limited issuance left investors with significant cash to deploy, helping Financial transactions achieve average subscription levels of around four times. This scarcity was particularly evident in deals from Societe Generale, Lloyds and Deutsche Bank, all of which attracted strong demand and performed positively after pricing.
- TenneT Germany was the standout European corporate transaction. As a newly established issuer following its separation from the wider TenneT Group, the company attracted strong demand for its €3.5bn multi-tranche deal, with bonds rallying between 6bps and 10bps after launch. By contrast, AT&T’s euro and sterling transaction struggled despite offering sizeable concessions, reflecting weaker sentiment towards the sector.
- Overall, July was a more challenging month for duration and technology-related credit. The portfolio remained selective, favouring transactions with clear valuation support while reducing exposure to heavily supplied areas where investor demand and secondary performance appeared less dependable.
