DNCA Invest SRI High Yield

September was marked by another rise in sovereign bond yields, against a backdrop of ongoing geopolitical tensions in the Middle East, rising energy prices, and economic activity that proved more resilient than expected.

In the eurozone, data released in September confirmed a stronger economy. GDP rose 0.6% in the second quarter of 2026, bringing year-over-year growth to 1.2%. Employment rose by 0.1% over the quarter, confirming the labor market’s resilience. Inflation, however, remained the main source of concern, driven primarily by energy costs

In the United States, the picture is even stronger. Economic activity remains supported by consumer spending, business investment, and AI-related spending. The contrast between solid U.S. growth and persistently high inflation has helped keep U.S. long-term rates under pressure.

September marked a significant turning point with simultaneous monetary tightening by the ECB and the Fed. The ECB raised its key interest rates by 25 basis points on September 10. This decision primarily reflects the energy shock and the desire to prevent the temporary rise in inflation from becoming a more persistent phenomenon. The Fed also raised its policy rate by 25 basis points on September 16, to 3.75%–4.00%, while emphasizing that economic activity remained strong, consumer spending was resilient, and inflation remained high. The central banks’ collective message has become significantly less accommodative: the main risk is no longer merely that of insufficient growth, but rather that of an energy supply shock lasting long enough to unanchor inflation expectations.

This reassessment of the monetary policy path, combined with a large supply of sovereign debt and rising energy prices, has led to a sharp rise in long-term rates. In the United States, the 10-year Treasury yield ended September around 5.3%; in Europe, the 10-year Bund yield rose back above 3.5% during the month; and in France, the 10-year OAT-Bund spread reached approximately 126 basis points at the end of September, amid strong concerns about French public finances and the 2027 budget. Levels not seen since the Global Financial Crisis

In this environment, investment-grade bonds suffered due to their longer duration, with spreads widening by only 3 basis points in both Europe and the United States. Performance stood at -1.3% and -2.7% on either side of the Atlantic. Despite its shorter duration, high-yield bonds were also impacted. Spreads widened by 55 bp in Europe and 40 bp in the United States, with returns at -1.7% and -2.4%, respectively. For the credit market as a whole, primary issuances were very abundant during the month. This momentum was expected, but the rapid rise in rates may have accelerated corporate supply. IG issuance totaled €77 billion (compared to a historical average of €59 billion), and non-financial HY issuance totaled €20.7 billion (compared to an average of €8.9 billion). On the demand side, inflows deteriorated over the four weeks of the month (more than €2 billion in outflows from investment-grade bonds and -€1.1 billion from high-yield bonds, particularly from ETFs).

The DNCA Invest SRI High portfolio was impacted by a duration longer than that of its index and the correction in the high-yield market. While investments in USD underperformed those in euros, those in GBP outperformed. CCC-rated bonds were more resilient, as were convertibles, but AT1 subordinated bank debt, hybrids, and BB-rated bonds—which are more sensitive to interest rates—underperformed.

The sectors that contributed most to performance were energy, financial services, services, insurance, and transportation. Those that contributed the least were telecommunications, capital goods, real estate, utilities, and banks.

The issuers that contributed most to performance were AT&S (technology) via its convertible bond, Synlab (healthcare), Derichebourg (services), Ask Chemicals (basic materials), and Fedrigoni (capital goods). The issuers that contributed the least were Virgin Media O2 (telecommunications) due to uncertainties surrounding its asset sales; Fibercop (telecommunications), following disappointing results and a longer duration; Iqvia (healthcare); Coreweave (technology); and ZF (automotive).

During the month, we reduced certain idiosyncratic risks: SIG plc (capital goods), Advanz (healthcare), Stora Enzo (basic industries) ahead of its business split, Grand City (real estate), and Metlen (utilities). We participated in initial public offerings (IPOs) that offered solid fundamentals and attractive relative value: Boels (capital goods), Nexans (capital goods), Clariane (healthcare), Grünenthal (healthcare), Brighstar Lottery (leisure), Purgym (leisure), Derichebourg (services), SES’s hybrid debt (telecommunications), SoftBank (telecommunications), and Energia (utilities). We also made some reductions to our positions.

We remain confident in the fundamentals of European issuers, which should benefit in particular from a more favorable growth environment. Technical factors, however, appear less supportive than in previous months: the primary market remains dynamic, even though issuance volumes could slow during the third-quarter earnings season, while capital flows have recently shifted toward outflows.

At the same time, rising interest rates have helped restore more attractive yield levels. Given that rates are expected to remain high in the short term, we are favoring intermediate maturities, around five years.

As of the end of September, driven by interest rates and primary market activity, the portfolio’s yield rose to 6.1% and its duration increased to 3.6. We increased the proportion of BB-rated bonds in our investments (65%).