Adrien Pichoud

Head of Fixed Income

What happened last week?

Central banks

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

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.

Rates

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%.


Our view on fixed income 

Rates
NEUTRAL

We are neutral on government bonds with maturities of less than 10 years. This stance is supported by elevated real yields, an anticipated peak in central bank tightening, a shift toward disinflation, attractive relative value compared to equities, and improving correlations. Conversely, we hold a negative view on bonds with maturities exceeding 10 years. A flat yield curve and low term premiums reduce their attractiveness, particularly in the context of ongoing interest rate volatility and potential fiscal pressures.

 

Investment Grade
NEUTRAL
We are neutral on Investment Grade corporate bonds. The sharp tightening in credit spreads, reaching lowest level since 2021, has considerably reduced the margin for safety in credit. Corporate Spreads now represent less than 20% in the total yield of an investment grade bond. This “price to perfection” encourages us to be more vigilant in this segment while the credit market's overall health is supported by robust demand and strategic maturity management
High Yield
NEUTRAL

We are neutral on high-yield (HY) bonds, favoring short-dated HY while negative on intermediate and long maturities due to unattractive valuations. U.S. HY spreads have tightened, signaling low default expectations and economic stability. While short-term HY bonds offer selective opportunities, overall valuations appear stretched, particularly if volatility increases. We see more value in subordinated debt than HY bonds.

 
Emerging Markets
NEUTRAL
We have upgraded Emerging Market debt to neutral, driven by attractive absolute yields and solid fundamentals. The primary market remains healthy, and we favor short-dated EM bonds with yields above 6.5%. However, risks persist: valuations are stretched, Trump’s potential tariffs could pressure EM economies, and idiosyncratic risks remain, notably in Brazil and India. Given this backdrop, we stay selective, favoring short-duration opportunities while cautious on broader EM debt.

The Chart of the week

Yield Paths Diverge on Both Sides of the Atlantic 

Source: Factset, Banque Syz

USD and EUR long-term yields have strikingly diverged over the month of June. The US 10Y Treasury fell 17bp to 4.23%, its lowest since April, while the German 10Y Bund rose 11bp to 2.61%. This divergence comes despite the ECB cutting rates, while the Fed stayed on hold—a reminder that long-term yields are driven more by forward expectations than current policy. In the United States, signs of slowing consumption and softer-than-expected inflation have again infuriated President Trump, who is once more openly calling for a change in Fed policy and of Fed Chair, possibly before the official end of Jerome Powell’s term in 2026. Lower growth, lower inflation, and the prospect of a more dovish Fed have contributed to the decline in US Treasury yields. Opposingly, in Europe, economic activity has proved to be more resilient than feared so far and the ECB signaled that it may be close to (or already have reached) the end of its rating cycle initiated a year ago. And Germany is readying itself for an unprecedented fiscal plan of infrastructure and defence spendings. The government announced a 3.2% budget deficit for next year, above expectations, and raised its projected bond issuance for the third quarter to €81.5bn (up €19bn compared to previous planning). Fiscally supported growth prospects, the end of the ECB rate cut cycle, and a flood of government bond issuances have driven euro government yields higher. The yield gap between the US and the eurozone could narrow further in the months ahead.

Disclaimer

This marketing document has been issued by Bank Syz Ltd. It is not intended for distribution to, publication, provision or use by individuals or legal entities that are citizens of or reside in a state, country or jurisdiction in which applicable laws and regulations prohibit its distribution, publication, provision or use. It is not directed to any person or entity to whom it would be illegal to send such marketing material. This document is intended for informational purposes only and should not be construed as an offer, solicitation or recommendation for the subscription, purchase, sale or safekeeping of any security or financial instrument or for the engagement in any other transaction, as the provision of any investment advice or service, or as a contractual document. Nothing in this document constitutes an investment, legal, tax or accounting advice or a representation that any investment or strategy is suitable or appropriate for an investor's particular and individual circumstances, nor does it constitute a personalized investment advice for any investor. This document reflects the information, opinions and comments of Bank Syz Ltd. as of the date of its publication, which are subject to change without notice. The opinions and comments of the authors in this document reflect their current views and may not coincide with those of other Syz Group entities or third parties, which may have reached different conclusions. The market valuations, terms and calculations contained herein are estimates only. The information provided comes from sources deemed reliable, but Bank Syz Ltd. does not guarantee its completeness, accuracy, reliability and actuality. Past performance gives no indication of nor guarantees current or future results. Bank Syz Ltd. accepts no liability for any loss arising from the use of this document.

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