As the new season looms, the final week of August has brought little in the way of fresh news for bond markets. Instead, it feels more like a condensed version of the broader narrative we’ve seen throughout 2025: upward pressure on sovereign yields, counterbalanced by steady credit performance. This dynamic has allowed corporate bond funds and indexes to continue outperforming, all while exhibiting relatively low volatility.

Credit spreads have been largely stable. Earnings reports are not triggering any meaningful re-pricing—no major tightening or widening of spreads—and sector, maturity, and rating hierarchies remain broadly unchanged. Some might call this the calm before the storm, but for now, it’s a calm that still delivers, with absolute yields ranging from 2% to 5%, depending on the asset class.

Still, amid this general quiet, a few issuers are doing their best to break away from the pack—though not always in the right direction.

France stands out in this regard. Since the dissolution of the National Assembly in 2024 and a series of fiscal and political missteps, French government bonds have been steadily losing ground relative to their European counterparts. This week marked a historic low: for the first time since the creation of the euro, France’s 5-year yield rose above that of all other eurozone countries—including Italy and Greece, as shown in the chart below.

Source : Bloomberg

For now, France’s 10-year yield remains marginally below its Italian counterpart, but the chart below clearly illustrates that the underlying trend is similar, and this dynamic is likely to extend across the entire curve. The earlier shift at the 5-year point can be explained by the French government’s recent issuance: on August 21, it placed €10 billion in new bonds maturing in 2028, 2030, and 2031. This concentrated supply exerted upward pressure on yields in the 5-year segment of the curve.

Source : Bloomberg

As soon as the French government begins issuing new 10-year debt—which is likely to happen sooner rather than later, given its substantial and near-weekly financing needs—the 10-year yield will almost certainly rise above Italy’s. Unfortunately, setting politics aside, it is difficult to foresee a positive near-term outlook for French sovereign debt. The positioning we adopted in the Octo funds back in June 2024 (see Hebdo Crédit of 13/06/2024) remains fully valid today:

• Limit exposure to French sovereign bonds to the smallest possible allocation within portfolios—not because default is imminent, but because the risk/return profile is unappealing and the trend remains clearly negative.
• Reduce exposure to French banks and insurers, many of which have balance sheets heavily loaded with French government bonds, income statements closely tied to domestic economic performance, and ratings that are often only one or two notches above that of the sovereign.
• Avoid French corporates in politically sensitive or state-influenced sectors such as energy, utilities, and real estate. A prime example remains the €8 billion levy on EDF in 2022 to fund the government's "tariff shield"—a stark reminder of the risks tied to companies operating in strategic sectors.

Some investors have flagged Fitch’s upcoming rating decision on 12 September as a potential risk. However, we see this event as largely inconsequential. Like most rating agency actions, it is likely to be a delayed validation of market sentiment rather than a catalyst for new repricing. Rating changes often arrive well after the market has adjusted.

There are countless examples of this pattern—Atos, Casino, Wirecard, to name a few—and this week brought yet another case study: Worldline.

As we've repeatedly highlighted in previous editions of Hebdo Crédit (6 June, 20 June, and 27 June 2025), Worldline—a former subsidiary of Atos (or as Newton might have put it, “the apple doesn’t fall far from the tree”)—has long presented significant balance sheet and credit risk. Markets had already priced in these concerns by June, as evidenced by a sharp sell-off in its bonds and yields spiking above 9%, far beyond what would be expected for an investment-grade issuer.

On 22 August, after two months of reflection, S&P downgraded Worldline from BBB- to BB, officially relegating it to high-yield status. Unsurprisingly, this had little immediate effect on bond prices, which had already anticipated the move. That said, the downgrade is likely to trigger a marginal additional decline, driven not by fundamentals but by mechanical flows: index and ETF adjustments, or sales by investors constrained by external ratings. Ironically, while asset managers in France have been prohibited by the AMF since 2015 from relying solely on agency ratings for investment decisions, index ETFs—also managed by asset managers—still operate with this exact constraint. A regulatory paradox, but a familiar one. As La Fontaine observed long ago in Les animaux malades de la peste, when it comes to responsibility and consequences, some actors are always more equal than others.

Source : Bloomberg

The entire Octo Funds team hopes you enjoyed a great summer !

Matthieu Bailly