“U.S. High Yield Is More Vulnerable Than European High Yield and We Could See Defaults”

While the market remains focused on the evolution of the commodity shock triggered by the war between Iran and the United States, investors should look beyond the short term to assess the potential medium-term impact of this new geopolitical episode on inflation. François Collet, CIO of DNCA Investments since October 2025, rules out a scenario similar to the one experienced during the 2022 Ukraine war, but warns about the need to hedge against a potential rise in inflation and the second-round effects it could bring, for example, on U.S. credit.

In an interview conducted during the Natixis Investment Managers Thought Leadership Summit 2026, recently held in Paris, Collet addressed topics such as opportunities in European sovereign debt, with a particular focus on Spain and Portugal, as well as the regime shift in the safe-haven role of U.S. Treasuries. He also provided insights on asset allocation in a context of persistent inflation, advocating for greater diversification beyond the 60/40 model.

How do you assess the increase in geopolitical risk from a fixed income manager’s perspective? What could be the medium-term impact on inflation?

The market has priced in short-term inflation very quickly, especially in Europe. The impact on one-year inflation expectations is close to 1% in Europe, while in the U.S. it is lower, around 50 basis points.

So I think the market’s short-term assumption is correct. What has not really been priced in yet is a kind of second-round effect. When a commodity crisis occurs, there is a direct impact on CPI, but many other factors take time to materialize, such as gasoline prices, of course, but also higher transportation costs or airline tickets. All of this will eventually have an impact on wages, because as inflation rises and the labor market remains tight, people will demand higher compensation. So I really believe this will lead to higher core inflation in the future. The transmission from headline CPI to core CPI due to commodity shocks is about 12 to 18 months. So I expect that, within a year, inflation will not return to the levels seen just before the conflict began.

In light of what happened during the 2022 commodity crisis, is the ECB more willing to raise interest rates this time?

I think the situation is very different. First, the impact of the commodity crisis is much smaller when it comes to gas prices. In 2022, 70% of electricity prices depended on gas prices. Now it is only 40%. Therefore, the impact on electricity should be much lower, partly due to the increase in renewable energy and because the impact on gas has been more contained.

Second, the starting point for inflation is different. We are around 2% inflation versus 4% in 2022, and the starting point for monetary policy is not the same at all. Back then, we had negative interest rates. Today, we are in a neutral position.

So overall, I think the ECB has time to assess the medium-term impact of this inflationary shock and try to avoid past mistakes, such as raising rates too late in 2022, but also the mistakes made in 2018 and 2011.

That said, could rates rise before the end of the year? Of course, but I doubt it will happen in June. And even if they do raise rates, I think it would be two hikes of 25 basis points, compared to the 450 basis points we saw in 2022.

What impact can be expected on sovereign bonds?

What the market is pricing today is perhaps the worst-case scenario for the ECB. However, there are countries with excellent fundamentals, such as Portugal and Spain, that offer very attractive valuations. Since the beginning of the year, yields around 3.25% have represented a great opportunity for Spanish bonds, which have moved within a narrow range. I do not expect that to change before the end of the year. Taking into account carry and roll-down, that implies an expected return of around 4% over 10 years for Spanish sovereign bonds this year, which is quite attractive.

Fixed income markets currently look quite tight in many areas, especially in investment grade…

Yes, it is true that credit spreads are tight. However, it is very difficult to imagine defaults among investment grade companies. Fundamentals are quite solid. So the issue is more about the attractiveness of buying these bonds rather than the risk of them collapsing due to defaults.

It is not exactly the same picture in the U.S., where I think the high yield market is more vulnerable and some companies could default. But I do not believe there will be contagion between private credit and public credit. On the contrary, I think that lower interest in private debt in the future could redirect some flows toward public credit. Overall, I am not that pessimistic about public credit.

Over the past year, there has been much debate about U.S. Treasuries and their ability to remain a safe haven. Do you think they still fulfill that role?

Unfortunately, I think the sustained negative correlation between Treasuries and equities is a thing of the past. We are living in a higher inflation environment than in the previous decade. When inflation is low or around the central bank’s target, this negative correlation can exist, but not when inflation is above target, and today it stands at around 3%. I do not think the Fed will maintain a restrictive policy. We are facing this inflationary shock. So, fundamentally, I believe investors should rethink their asset allocation rather than simply hedging equity portfolios with Treasuries. That will no longer work in the long term.

What do you suggest to protect portfolios going forward?

Diversification is key, not just through a 60/40 portfolio, but by investing in inflation-linked bonds, commodities, and different types of assets, including cryptocurrencies depending on the investor’s profile. Ultimately, I believe investments should be spread across as many asset classes as possible.

It is important to be careful not to invest in low-quality products, because the financial sector is very good at launching high-margin products. In the long run, costs have a significant impact on returns. But once you invest in well-designed products, I think it is very important to do so.

How are you positioning your portfolios?

We are mainly invested in government debt. We have a long position in European real rates and in peripheral rates. We also maintain long positions in sovereign bonds from the United Kingdom and New Zealand, where we see expectations of rate hikes as premature and yield curves as very steep.

We have a structural position consisting of a short position in the euro and long positions in commodity-exporting currencies, as well as Asian currencies such as the Japanese yen, the Korean won, the Indonesian rupiah, and also the Australian dollar. We believe Asian currencies should benefit from a revaluation, as exchange rates are currently undervalued in these economies.

Another key position for us is investing in U.S. inflation breakevens. We believe it will be very difficult for the Fed to bring inflation down, which has been temporarily suppressed by short-term factors related to the government shutdown. I think personal consumption expenditures (PCE) is a more relevant indicator than CPI. PCE was around 3% before the war. I believe it could rise to between 3.5% and 4% over the next 12 months. Investing in inflation breakevens, currently around 2%, provides a good hedge.