• Bonds broadly gained in August, as markets priced in multiple rate cuts by central banks before the end of the year. 

• Government bond yields fell, with the exception of the UK. In the US, 2- and 10-year Treasury yields fell by 34 bps and 13 bps, respectively. 

• In credit markets, investment-grade spreads broadly widened over the month. 

Fixed income markets broadly gained in August, as markets continued to price in interest rate cuts in the US. 

Weaker-than-expected US payroll data released at the start of the month sparked fears of a US recession, which led to one of the largest bond market rallies since March 2023¹. Markets moved to price in over 100 basis points (bps) of rate cuts by the US Federal Reserve (Fed) before the end of 2024, and the data release even fuelled speculation of an emergency Fed rate cut. However, strong retail sales data helped dampen concerns, briefly pushing yields slightly higher before ending the month below their July levels. 

Inflation in developed markets broadly slowed in August. In the US, headline and core inflation (which excludes energy and food costs) both surprised to the downside, falling to 2.9% and 3.2%, respectively. In the UK, headline inflation rose slightly to 2.2%, while core inflation moderated to 3.3%. Additionally, the closely-watched UK services inflation moderated to 5.2%. In the euro area, inflation slowed to its lowest levels since mid-2021, with headline and core inflation at 2.2% and 2.8%, respectively.

The Fed and the European Central Bank (ECB) left interest rates unchanged at their August meetings, at 5.25%-5.5% and 3.75%, respectively. Both central banks cited persistent inflation, yet expressed confidence that their economies were on sustainable paths towards inflation targets. The Bank of England (BoE) cut interest rates for the first time since 2020, reducing its Bank Rate from a 16-year high of 5.25% to 5.0%. However, Governor Bailey stressed that domestic inflation pressures remained elevated, and markets viewed the move as a “hawkish” cut. Meanwhile, the Bank of Japan raised interest rates by 15 bps and announced reductions in its bond-buying programme.

Monthly performance by market

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Source: Bloomberg. For the period 31 July 2024 to 31 August 2024. Calculations are based on monthly total returns, in USD. Bloomberg indices used as proxies for each exposure².

Government bonds

Government bond yields broadly fell over the month, with the exception of the UK. In the US, 2- and 10-year yields fell by 34 bps and 13 bps, respectively. In the euro area, German 2-year yields fell by 14 bps, while 10-year yields remained relatively flat. In the UK, 2- and 10-year yields rose by 28 bps and 5 bps, respectively³. 

Credit markets

In credit, investment-grade spreads broadly widened over the month, driven by concerns over slowing growth. US investment-grade spreads remained flat, while euro  and sterling investment-grade spreads widened by 7 bps and 6 bps, respectively⁴. However, emerging market (EM) bond spreads broadly tightened, with EM investment-grade and EM high-yield spreads falling by 8 bps and 9 bps, respectively⁵. 

Monthly change in spreads (bps)

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Source: Bloomberg. For the period 31 July 2024 to 31 August 2024. Proxies used for each exposures⁶.

The second-quarter earning season has now largely concluded. Earnings ‘beats’⁷ prevailed, although positive surprises were broadly in line with historical averages (at 54% of reporting companies). There were a number of significant earnings misses and guidance downgrades in the consumer discretionary sector; while the financials, telecoms, utilities and healthcare sectors were bright spots⁸. 

The technical backdrop for corporate bonds remains positive. Since the beginning of the year, we have observed steady inflows into investment-grade credit. With the first rate cuts by the ECB and BoE now delivered, central banks are sounding increasingly dovish while corporate bond yields remain at attractive levels – particularly in Europe, where the investment-grade credit premium versus the 10-year German Bund yield is around 1.2%⁹. We expect demand for credit to remain strong into the final months of 2024.  

Emerging markets

EM credit markets saw strong total returns in August, gaining 2.3%. Credit spreads tightened over the month, with investment-grade and high-yield spreads falling 9 bps and 13 bps, respectively¹⁰. In addition, EM credit markets benefitted from strong returns in US government bonds (+1.5%), owing to a 13 bps rally in the US 10-year Treasury yield.

EM investment-grade and high-yield spreads 

Source: Bloomberg and Vanguard. For the 24 months to 31 August 2024. Proxies used: EM investment-grade: Bloomberg EM USD Aggregate Average OAS Index; EM high-yield: Bloomberg Emerging Markets High Yield Average OAS Index. 

Outlook

We continue to believe that yields are attractive. Historically, yields at these levels have typically been followed by strong returns over the following six to 12 months.

In credit markets, spreads are consistent with a soft-landing narrative. We remain of the view that, overall, investment-grade company fundamentals are in good shape, thanks to the deleveraging efforts by firms over the past few years. 

Primary issuance markets, which are usually relatively quiet during the summer months, came back to life earlier than expected, with new-issue supply in August higher than it has been historically. We expect new-supply activity to remain elevated in the coming weeks. September, typically one of the busiest months for new issuance, could see even more activity than usual, with issuers tapping markets ahead of any potential volatility in the run-up to the US elections in early November. Year-to-date new issuance has now exceeded 80% of the expected total amount for the year¹¹. However, even if the next three months prove busier than expected, we believe the higher levels of new supply will be relatively well-absorbed, owing to strong demand.

Within investment-grade credit, we are starting to see European investment-grade corporates mean-revert, although we continue to see more value in Europe  versus US investment-grade credit. In high-yield corporate bond markets, we continue to see a pick-up in rising-star activity compared to fallen angels¹², as the macroeconomic environment has been more favourable than expected. A recessionary scenario would see lower-quality sectors become more vulnerable, although with yields at current levels, they would likely offset a widening in spreads. 

We remain constructive on EM fixed income, as fundamentals are strong and yields are attractive, which we believe should support the asset class. However, valuations are tight and risks around US monetary policy remain.

¹ Source: Bloomberg and Vanguard, as at 31 July 2024.  

² Source: Bloomberg and Vanguard. Based on the Bloomberg Global Aggregate Credit Index, for the period 30 June 2024 to 31 July 2024. 

³ Source: Bloomberg and Vanguard. Based on the Bloomberg EM USD Aggregate Average OAS Index and Bloomberg Emerging Markets High Yield Average OAS Index, for the period 30 June 2024 to 31 July 2024.

⁴ ‘Beats’ refers to companies surpassing consensus analyst earnings estimates.

⁵ Source: Bloomberg and Vanguard, based on corporate earning results for the reporting period 1 April 2024 to 30 June 2024, as at 31 July 2024. 

⁶ YTD issuance represents the period 1 January 2024 to 31 July 2024. 

⁷ ‘Rising stars’ refer to high yield issuers whose credit ratings have been upgraded from sub-investment grade (Ba1/BB+ or lower) to investment-grade (Baa3/BBB- or above) by ratings agencies S&P, Moody’s and Fitch. ‘Fallen angels’ refer to investment-grade issuers whose ratings have been downgraded to below investment-grade. An increase in rising-star versus falling-angel activity can signal a strengthening economic environment and/or improved corporate fundamentals. 

⁸ Source: Bloomberg and Vanguard, based on corporate earning results for the reporting period 1 April 2024 to 30 June 2024, as at 31 August 2024.

⁹ Source: Vanguard 

¹⁰ Source: Vanguard and JP Morgan. Based on the JP Morgan Emerging Market Bond Index (EMBI) Global Diversified Index relative to US Treasuries. 31 July to 31 August 2024. 

¹¹ Source: Vanguard. ‘Year-to-date issuance’ is for the period 1 January 2024 to 31 August 2024.  

¹² ‘Rising stars’ refer to high yield issuers whose credit ratings have been upgraded from sub-investment grade (Ba1/BB+ or lower) to investment-grade (Baa3/BBB- or above) by ratings agencies S&P, Moody’s and Fitch. ‘Fallen angels’ refer to investment-grade issuers whose ratings have been downgraded to below investment-grade. An increase in rising-star versus falling-angel activity can signal a strengthening economic environment and/or improved corporate fundamentals.