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What happened last week?
A Year of Policy Pivots and Market-Moving Surprises
In a dramatic year for monetary policy, 2024 saw major central banks execute remarkable policy shifts that reshaped the fixed income landscape. The Federal Reserve's September pivot marked a defining moment, launching a highly anticipated easing cycle that delivered 100 basis points of cuts by year-end. However, December brought an unexpected twist - Chair Powell's hawkish shift and drastically reduced dot plot projections sent shockwaves through markets, suggesting just two cuts for 2025 and pushing back inflation target achievement to 2027. The ECB navigated an especially complex environment, balancing stubborn core inflation against fragile growth. While matching the Fed's 100bp of cuts to end at 3.0%, President Lagarde maintained a notably cautious stance. The December meeting proved particularly significant, with upward revisions to long-term inflation forecasts acknowledging persistent wage pressures and supply chain challenges through 2025. Switzerland's SNB emerged as 2024's boldest actor, shocking markets with an aggressive 50bp December cut. Under new Chairman Martin Schlegel's leadership, the central bank leveraged Switzerland's controlled inflation and strong franc to pursue decisive easing - a stark contrast to its typically conservative approach. The Bank of England charted a more measured course, pausing after 50bp of H2 cuts as late-year inflation data warranted caution. Meanwhile, the Bank of Japan continued its gradual journey toward normalization, holding steady after two historic rate hikes earlier in 2024 despite above-target inflation.
Credit markets emerged as 2024's fixed income bright spot, delivering impressive returns that outpaced both government bonds and cash investments. U.S. investment-grade credit demonstrated resilience, with spreads tightening 15 basis points to close at 80bps, driving the Vanguard USD Corporate Bond ETF to a +2.80% gain. High-yield performed more impressively, with the iShares Broad USD High Yield Corporate Bond ETF surging +8.50%. The high-beta CCC segment proved particularly rewarding, as the BondBloxx CCC-Rated ETF delivered an exceptional +13.00% return. European credit markets matched this strength, with investment-grade spreads breaking below 100bps for the first time since January 2022, propelling the iShares Core Euro IG Corporate Bond ETF to +4.40%. The high-yield segment compressed to 319bps, lifting the iShares Euro HY Corporate Bond ETF by +5.90%. Subordinated debt excelled, with AT1 CoCos (+9.80%) and corporate hybrids (+10.50%) benefiting from improved bank fundamentals and attractive carry. 2024's standout story was the powerful technical backdrop. In the U.S., reinvestment flows from high-coupon bonds covered nearly half of net IG issuance and fully absorbed high-yield supply. European high-yield benefited from persistent negative net issuance since 2022, a trend expected to continue through 2025. The year saw significant corporate developments reshape credit markets. Global corporate debt issuance soared to a record-breaking $8 trillion, up 33% compared to 2023. This surge was fueled by issuers capitalizing on central bank rate cuts and favorable borrowing conditions. U.S. investment-grade (IG) issuance reached $1.7 trillion in 2024, up 27% year-over-year, while European IG markets posted their busiest calendar in over a decade. The automotive sector grabbed headlines with Nissan and Honda's potential $52 billion merger talks, reflecting mounting pressure from Chinese EV manufacturers. The private credit market continued its meteoric rise, becoming an increasingly vital funding source for higher-risk borrowers. With its rapid growth, concerns over transparency, loan quality, and systemic risk escalated, prompting louder calls for regulatory oversight. Looking ahead to 2025, credit markets' technical strength and attractive carry suggest continued outperformance, though investors should remain vigilant given the Fed's hawkish pivot and Treasury market volatility. Focus should remain on sectors with strong fundamentals and manageable refinancing needs.
Cash Proves King in a Challenging Bond Market
2024 delivered a sobering lesson in fixed income markets: even substantial central bank easing couldn't guarantee positive returns. Despite multiple rate cuts across major economies, most bond segments failed to outperform cash returns, challenging traditional fixed income allocation strategies. U.S. Treasuries particularly disappointed, with the iShares USD Treasuries ETF gaining just +0.69% despite the Fed's 100bp of cuts. Duration positioning proved crucial, as shorter-term bonds demonstrated greater resilience with the iShares 3-7 Year Treasury Bond ETF returning +1.81%, while longer-dated securities suffered significant losses, exemplified by the iShares 10-20 Year Treasury Bond ETF declining -4.22%. The yield curve's transformation marked a defining feature of 2024: shifting from deep inversion to modest steepening, with 2s10s moving from -38bps to +33bps and 3m10s recovering from -148bps to +24bps. Year-end yields of 4.57% for 10-year and 4.78% for 30-year Treasuries reflected persistent pressure from elevated real rates and waning foreign demand, particularly from Asian central banks and sovereign wealth funds. TIPS emerged as a relative bright spot, gaining +1.65% on rising breakevens (2.34%) and robust real yields (2.22%). European sovereign bonds demonstrated greater resilience, with the iShares Core EUR Govt Bond ETF returning +1.50%, while inflation-linked bonds disappointed, ending flat at -0.20% as German breakevens remained stubbornly below the ECB's target at 1.78%. German 10-year Bund yields closed at 2.40%, while spreads widened for France (above 80bps) and tightened for Italy (115bps), reflecting evolving political and fiscal dynamics across the Eurozone. Swiss bonds stood out positively (+3.90% for the 7-15 year segment), benefiting from the SNB's aggressive easing and currency strength. In contrast, UK gilts (-3.75%) and Japanese government bonds (-4.50%) ranked among developed markets' worst performers, plagued by persistent inflation concerns and domestic challenges. While 2024's performance tested investors' patience, the higher yield environment entering 2025 offers enhanced income potential and improved total return prospects, particularly if central banks follow through with anticipated easing cycles. However, investors should remain mindful of duration risk and consider maintaining barbell strategies given ongoing yield curve uncertainty.
Emerging market
A Year of Recovery and Transformation.
Emerging Market debt demonstrated impressive resilience in 2024, with the Bloomberg EM Hard Currency Aggregate Index delivering +6.6% returns amid improving fundamentals. Sovereign spreads reached their tightest levels since 2018 at 250bps, while corporate spreads compressed to 210bps, highlighting robust investor demand. The high-yield sector particularly excelled, with spreads breaking below 400bps for the first time in six years. China remained central to the EM narrative, achieving approximately 5% GDP growth despite property sector challenges and debt levels approaching 300% of GDP. The PBOC's accommodative stance, including multiple rate cuts and reserve requirement reductions, supported markets. However, Chinese bond yields fell dramatically, with the 10-year reaching a record low of 1.67% - creating a 22-year high yield discount to U.S. Treasuries that helped fuel exceptional Asian high-yield returns of +14.3%. Latin America witnessed transformative developments. Argentina's radical reforms under President Milei, including ambitious privatization plans, triggered substantial bond rallies (>100% in 2024). Brazil faced headwinds from fiscal uncertainties, prompting the central bank to rise SELIC rates to 12.25%, while Mexico cut its interest rates from 11.25% to 20%. Distressed market turnarounds proved remarkable, with Pakistan and Egypt staging impressive recoveries backed by IMF support and enhanced political stability. Romania navigated political turbulence that pushed its 5-year CDS to 185bps, highest level since early 2023, before finding stability through a pro-European coalition government. Corporate EM debt (+5.8%) showed particular strength in sectors aligned with global themes like EV battery manufacturing and semiconductor production. Indian corporates outperformed (+7.2%), buoyed by robust domestic growth and increased foreign investment. Looking ahead to 2025, EM debt's attractive yields and improving fundamentals offer compelling opportunities, particularly as developed market central banks pivot toward easing. However, investors should remain vigilant given China's ongoing challenges, numerous upcoming EM elections, and potential market volatility.
