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What happened last week?
There was no major central bank’s meeting last week except for the Bank of Mexico, who extended its rate cut cycle as expected with a 50bp rate cut, lowering its key rate down to 8% (vs 11% a year ago).
In the United States, odds of Fed’s rate cuts in H2 continued to rise amid soft economic activity data, contained inflationary pressures and rising political pressure and rumors around an early replacement of Chair Jerome Powell at the helm of the Fed. Since the last FOMC meeting on June 18th and despite the rather hawkish bias displayed in the dot plot, future markets have been gradually pricing in a third 25bp by the end of the year (with a 67% probability now), on top of the two priced since mid-May.
Conversely, in Europe, several ECB members stressed that ECB rates are now back to neutral after the June rate cut and that, while additional rate cuts were still a possibility, they will depend on growth and inflation developments. Future markets continue to price one last 25bp rate cut by the end of the year in this cycle.
In the UK, comments by Governor Bailey on growing slack in the labor market and a likely “significant decline in wage growth in the year ahead” signaled that, despite elevated short-term uncertainties, the medium-term outlook for inflation was encouraging and will likely allow the Bank of England to lower its key rate more than what could be expected only a few weeks ago. A third 25bp rate cut by the end of the year is now assigned a 25% probability, the highest since April.
Overall, the global monetary policy easing cycle is still on and can be expected to extend in the second half of the year, with different speeds and magnitudes among the main economic areas.
Credit market delivered broad-based gains following the Israel-Iran ceasefire, a trade framework between the US and China, and the EU’s potential move to lower import tariffs on US goods ahead of the July 9 deadline.
The removal of Section 899 is welcome news to many. US Secretary Scott Bessent reached a deal with G7 partners. The agreement will shield US companies from OECD Pillar 2 taxes that impose a 15% minimum corporate tax rate of 15% on multinational groups no matter where they operate.
Risk appetite remained buoyed. EUR inflows recorded seventh week of inflows while fund flows into European government bonds and money markets waned.
Within EUR investment grade (IG), European Banks, Auto and Tobacco outperformed year-to-date, while technology and retailers lagged.
Across the Atlantic, US IG cyclicals - Energy, Retail, Metals & Mining and Chemicals underperformed.
In the high yield space (HY), spread dispersion widened in the US HY, nearly half of US HY mutual funds outperforming their benchmarks, highlighting the critical role of credit selection.
In spread performance, US IG spreads were again flat, while U.S. high yield (HY) tightened materially by 11bps.
EUR IG tightened by 4bps and EUR HY by 1bps.
Despite a sharper-than-expected uptick in French and Spanish inflation, all segments of credit—including EUR—closed the week in positive territory. The outperformance of USD credits underscored that it will be too costly to underweight US investments, particularly in corporate bonds.
The U.S. IG bond ETF rose sharply by 1% (+3.7% year-to-date), and the main U.S. high yield ETF gained again by +0.7% (+4.4% YTD). Meanwhile, the Euro IG ETF inched up +0.1% (+1.7% YTD) and Euro HY ETF up 0.3% (+2.6% YTD).
Riskier segments also traded higher: Euro hybrid corporate bonds rose 0.3% (+2.6% YTD), and Additional Tier-1 bank capital (AT1s) +0.4% (+3.7% YTD).
Until there is greater clarity on inflation trends and growth prospects, selectivity remains paramount. Even so, the current environment enables investors to secure positive real returns after inflation, while awaiting tactical opportunities to extend duration.
USD rates continued to decline in the last days of the month, supported by a combination of easing inflation expectations and softer consumption and labor market data. The rising probability of a third 25bp rate cut by the end of 2025 fueled a bull steepening of the USD yield curve, dragging the short-end lower (UST 2y down 19bp to 3.72%, their lowest level since early May) while long-term rates experienced a milder decline (UST 10y down -15bp to 4.23%). The 10-year inflation breakeven drifted back to below 2.30%.
As a result, all segments of the US Treasury curve extended their positive dynamic in the last days of the month and posted solid positive performances over the entire month of June. The US Treasury ETF was up +1% in June, led by medium and long-term bonds (iShares Treasury 7-10y +1.3%, 10-20y +1.9%, 20y+ +2.3%) but shorter maturities also recorded positive returns (iShares Treasury 1-3y +0.25%, 3-7y +0.8%). The iShares USD TIPS (+0.7%) benefited from the decline in real rates, while inflation expectations were only marginally softer over the month (10y breakeven -5bp to 2.28%).
In Europe, the rate dynamic was opposite, with EUR sovereign yields up across all maturities in the Eurozone and Switzerland. The 25bp rate cuts by the ECB and SNB were largely expected and barely had an impact on the EUR and CHF yield curves, but hints that those two central banks are not sure yet whether more rate cuts will be warranted led to a bear steepening in yield curves, also fueled by prospects of larger-than-expected German public debt issuance. The German Bund 10y was up +11bp to 2.61% and the Swiss Confederation up +17bp to 0.44%.
European Government bonds ETF had a negative month of July in terms of performance (3-7y -0.1%, 10-15y -0.3%, 15-30y -0.8%), except for the shorter maturities (1-3y +0.1%). As the rise in EUR rates was partly driven by rising long-term inflation (German 10y inflation breakeven up expectations up +5bp in June), the iShares Euro Inflation Linked Government Bond ETF posted a positive performance last month (+0.5%). CHF government bonds had a negative month of June (3-7y ETF down -0.9%, 7-15y -1.9%) while GBP government bonds recorded solid positive performances (iShares UK Domestic Government Bond 3-7y +1.5%).
Emerging market
Emerging market (EM) sovereign dollar bonds rallied last week, driven by declining U.S. Treasury yields and a softer dollar. Argentina, Romania and Poland led positive performance.
Strong inflows into EM debt continued, recording their largest inflow on record.
Both S&P and Moody’s downgraded Colombia by one notch, though Moody’s maintains the country’s investment grade with a stable outlook. The downgrades reflect persistent fiscal deficits—projected at 7% of GDP for 2025—and the government’s decision to suspend the fiscal rule.
President Gustavo Petro is ineligible for re-election in the May 2026 vote. Market consensus anticipates a shift toward a more pro-business policy stance under the next administration.
In China, the central bank retained its easing bias but signalled a more measured approach, shifting from explicit “rate cut” language to a commitment to “flexibility in determining policy easing,” in response to emerging signs of economic momentum. Investor sentiment onshore has turned less bearish, and most expect future easing to be reactive rather than pre-emptive.
EM government bonds delivered strong returns in both local currency and USD. The VanEck J.P. Morgan EM Local Currency Bond ETF rose +1.7%, while the benchmark EM USD sovereign bond index gained +0.9%.
EM corporate bonds advanced +0.4%, and the iShares USD Asia High Yield Bond ETF recovered +0.7%.
