Chart of the Week
Since the beginning of the year, the ECB has cut its key interest rates four times, bringing its deposit rate down to 2%, compared with 3% at the end of 2024. Reflecting these adjustments, the €STR -which serves as the key money market benchmark – has returned to 1.9% and could continue to fall: the market is still anticipating a final rate cut by the ECB before the end of the year.
Meanwhile, other moderate-risk options continue to deliver steady returns in the fixed income markets. As of July 18, short-term high yield bonds, represented by the ICE BofA 1-3 Year Euro High Yield Constrained Index, offer a yield-to-maturity of approximately 5% per annum. This yield advantage has allowed the index to consistently outperform money market instruments over the long run.
OUR ANALYSIS
Short-term high yield bonds are naturally more volatile than money market instruments and the short-term investment-grade segment. However, they exhibit lower volatility compared to the overall high yield market, offering a relatively conservative approach to fixed income investing. This is paired with yields-to-maturity that currently stand well above inflation.
Moreover, it is worth noting that since 2007, declines in this market segment – typically linked to periods of market stress (e.g., 2008, 2011, 2020, and 2022) – have almost always been fully recovered within just one year.
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Written on July 18 2025. Opinions subject to change.
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