.png)
What happened last week?
Central bankers reinforced a cautious, data-dependent stance this week, emphasizing patience in the face of mixed economic signals. Several U.S. Federal Reserve officials made it clear they see no need for immediate policy moves: Mary Daly (San Francisco Fed) and Lorie Logan (Dallas Fed) both indicated there is no urgency to adjust rates, given that inflation is cooling but not yet at target. Fed Governor Christopher Waller added that he would support cutting rates in 2025—but only if inflation continues on a convincing downward path toward the Fed’s 2% goal. In an unusual high-profile meeting, Fed Chair Jerome Powell met with President Trump at the White House and firmly underscored the Federal Reserve’s independence. Powell stressed that monetary policy decisions will be based solely on incoming data and objective analysis, free from political influence—an important signal given past presidential pressure on the Fed. Across the Atlantic, the European Central Bank is widely expected to cut its key rate by 25 basis points at its June meeting, although officials caution that there is limited scope for further easing beyond that initial cut. The Swiss National Bank likewise struck a flexible tone regarding its post-June policy path, indicating it will keep options open depending on economic conditions. Notably, market pricing now reflects roughly 55 bps of Fed rate reductions over 2025, showing that investors anticipate some easing next year even as the Fed preaches patience. All told, major central banks remain in “wait-and-see” mode—holding steady for now and reminding markets that any future moves will depend entirely on the evolving economic outlook.
Trade policy uncertainty lingered, but it did little to deter the resurgence of demand in credit markets. Despite mixed U.S. court rulings on tariffs that kept investors guessing, both investment grade and high yield corporate bonds saw strong interest and spread tightening this week. Inflows returned to corporate bond funds on both sides of the Atlantic, marking a notable turnaround from the outflows seen during recent volatility. Credit spreads compressed across regions and ratings: in the U.S., investment grade spreads narrowed by about 2 basis points and high yield spreads by roughly 9 bps. European credit saw even more pronounced gains, with Euro IG spreads tightening 3 bps and Euro high yield rallying as spreads fell around 15 bps. These spread moves translated into solid price performance: the U.S. IG bond ETF rose approximately +1.1% over the week (now +2.0% year-to-date), and the main U.S. high yield ETF gained +0.8% (+2.8% YTD). European credit indices likewise advanced, with the Euro IG ETF up +0.5% (+1.5% YTD) and Euro HY ETF up +0.9% (+2.4% YTD). Notably, even riskier sub-sectors participated in the rally: Euro-denominated hybrid corporate bonds added +0.7% on the week (+1.8% YTD), and Additional Tier-1 bank capital securities (AT1s) jumped +1.0% (+2.6% YTD). The broad tightening in credit spreads reflects improved risk sentiment and investors’ ongoing hunger for yield. However, with tariff and trade negotiations still unresolved, markets remain alert to potential setbacks even as they capitalize on the carry and spread compression for now.
Global bond markets staged a broad relief rally as investors reacted to better inflation news and a temporary pause in trade tensions. Cooling price data eased fears of further central bank tightening, and a U.S. court ruling that briefly blocked President Trump’s new tariffs helped improve sentiment. In the U.S., Treasury yields fell across the curve, led by a sharp drop in long-term rates. The week’s Treasury auctions illustrated this shift in tone: a 30-year bond auction early in the week met with lackluster demand, but by mid-week a 7-year note auction saw strong bidding as investors’ appetite for duration returned. Inflows into long-duration bond funds also picked up, reversing weeks of outflows. The iShares 20+ Year Treasury Bond ETF jumped +2.1% on the week—its first gain after four consecutive weekly declines—as investors poured back into the long end. Other maturity segments also delivered solid positive returns: 10–20 year Treasuries returned +1.65%, 7–10 year +0.85%, 3–7 year +0.54%, and even short 1–3 year Treasuries were up +0.19%. This bullish steepening of the yield curve reflects growing market conviction that interest rates have peaked. European rates followed suit, with core yields drifting lower and bonds in peripheral countries outperforming. Investors’ risk appetite in Europe was buoyed by tightening spreads between peripheral sovereigns and German Bunds, as well as expectations of an upcoming ECB rate cut. Overall, after a challenging month for bonds, this week’s rally in rates underscored how quickly sentiment can turn when inflation fears ebb and policy risks recede.
Emerging market
Emerging market debt posted divergent results between local-currency and hard-currency segments. Local currency bonds rallied strongly this week, bolstered by a pickup in EM FX values against the dollar. The VanEck J.P. Morgan EM Local Currency Bond ETF climbed +1.44%, reflecting both high yields and currency gains in many emerging economies. By contrast, U.S. dollar-denominated EM bonds edged lower: benchmark EM sovereign bond indices lost about -0.57%, and EM corporate dollar bonds were roughly flat (-0.09%). Regionally, Asia remained a weak spot. Asian high-yield bonds (primarily USD-denominated) fell about -0.45%, weighed down by renewed concerns in China’s property sector. News of stress among Chinese developers once again dampened investor appetite for Asia credit, overshadowing the global tailwinds. On the other hand, Latin American markets continued to shine. High carry and an improving inflation backdrop in LatAm countries provided support to both local bonds and currencies, as some central banks in the region are already eyeing rate cuts. EMEA (Europe, Middle East, Africa) performance was mixed amid country-specific political risks – for example, elections and policy uncertainty in certain nations kept gains in check. The big picture for EM: local-currency bonds are outperforming thanks to favorable currency trends and higher yields, while hard-currency EM debt is seeing more muted performance due to idiosyncratic risks and its sensitivity to global credit conditions. This divergence underscores the importance of selectivity within EM fixed income, as investors gravitate toward pockets of strength and carry even as they remain wary of lingering risks.
