Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

Central banks

Fed Stays Cautious, ECB Faces Uncertainty, and Asia-Pacific Begins to Ease!

The global rate cycle took another turn last week, as central banks in Australia and New Zealand moved ahead with rate cuts, while the Federal Reserve and European Central Bank (ECB) held firm in their cautious stance. This growing divergence underscores how inflation progress—and economic resilience—varies across regions. In the Asia-Pacific, the Reserve Bank of Australia (RBA) cut its cash rate by 25bps to 4.10%, marking its first easing move since tightening aggressively in 2022-23. A day later, the Reserve Bank of New Zealand (RBNZ) followed with a larger-than-expected 50bps cut to 3.75%, extending its easing cycle that began in August 2024, when rates peaked at 5.50%. These moves reflect softer inflation trends in both countries, allowing policymakers to prioritize growth. Meanwhile, in the U.S., the Fed’s January 29 FOMC minutes reinforced its patient stance on rate cuts. Discussions included a potential slowdown in Quantitative Tightening (QT) due to concerns over financial system volatility linked to the unresolved debt ceiling. Policymakers emphasized that the rate path will depend on economic data, with some noting that if inflation remains elevated, rates could stay higher for longer. However, recent data suggests softening momentum—with February’s Flash PMI showing a sharp decline in U.S. services activity. This led markets to increase their rate cut expectations to -42bps by year-end, marking the most dovish shift in weeks. In Europe, the outlook remains clouded by geopolitical risks, U.S. tariffs, and upcoming German elections. While the region’s economy appears to be stabilizing after a weak 2024, inflation remains sticky, prompting ECB officials to urge caution. Markets have scaled back ECB rate cut expectations, now pricing in three 25bps cuts in 2025, down from nearly four a few weeks ago. In the UK, inflation rose to 3.0% in January—its highest level since March 2024—driven by regulated price adjustments. However, BoE Governor Andrew Bailey played down the move, helping stabilize BoE rate cut expectations at -53bps for the year. Finally, in Japan, robust Q4 GDP growth and rising inflation (4.0% YoY) suggest the BoJ may need to tighten policy further. Markets are now pricing 35bps of rate hikes for 2025, as Japan navigates a potential break from ultra-loose policy. With some central banks easing while others hold firm or even consider tightening, global monetary policy divergence is now in full swing, creating a complex backdrop for fixed income markets.

Credit

European Credit Outperforms as Ceasefire Hopes Lift Sentiment

The prospect of a Russia-Ukraine ceasefire and the stronger risk appetite in markets created a tailwind for European credit, allowing EUR credit to outperform U.S. credit significantly last week. Within high-yield (HY) markets, the biggest beneficiaries were BB- and B-rated credits, as these issuers tend to be more sensitive to geopolitical risks. The positive sentiment comes at a time when European HY technicals remain highly supportive, driven by low M&A activity and negative net issuance. Leveraged companies are increasingly turning to private credit and bank financing, reducing their reliance on bond markets and effectively shrinking the European HY market. A unique dynamic is emerging in EUR HY, where BB- and B-rated bonds are now trading below their coupon levels, creating an interest cost tailwind for companies refinancing maturing bonds. This strong technical backdrop has allowed European IG and HY total returns to rapidly close the gap with their U.S. counterparts. While U.S. credit markets were more muted, tariffs remain a key overhang. The mention of tariffs during Q4 earnings calls has surged tenfold since the start of the year, highlighting corporate concerns over higher costs and potential supply chain disruptions. U.S. IG spreads widened by 1bp to 81bps, reflecting some caution, though the Vanguard USD Corporate Bond ETF remained flat for the week (+1.3% YTD). In U.S. HY, spreads widened by 16bps to 278bps, marking a slight reversal in the year’s tightening trend. Despite this, spreads are still 14bps tighter YTD, and the iShares Broad USD High Yield Corporate Bond ETF slipped just -0.1% last week, holding onto a strong +1.8% YTD return. European investment-grade (IG) credit continued to tighten, with EUR IG spreads narrowing 3bps to 86bps, marking a new 12-month tight. The iShares Core Euro IG Corporate Bond ETF gained +0.1%, maintaining positive momentum. EUR HY was the standout performer, with spreads tightening 12bps to 280bps and now 31bps tighter YTD. The iShares Euro HY Corporate Bond ETF rose +0.2%, delivering a 1.4% YTD return, closing in on its U.S. HY counterpart. In subordinated debt, the WisdomTree AT1 CoCo ETF gained +0.1% for the week (+2.1% YTD), while European corporate hybrids remained flat but have returned +1.2% YTD. Recent downgrades of Celanese and Nissan will soon push their bonds into high-yield indexes, but notably, their credit spreads did not widen post-downgrade. This highlights the strong demand for HY paper and the impact of negative net issuance, which continues to support credit valuations despite macro uncertainties. With European credit markets benefiting from geopolitical optimism and stronger technicals, the performance gap with U.S. credit could continue to narrow in the weeks ahead. However, tariff risks and economic uncertainty remain key factors to monitor in both regions.

Rates

U.S. Treasuries Extend Gains as Economic Data Softens, While German Yields Rebound!

U.S. Treasury yields continued their downward trajectory last week, with bond markets rallying on a combination of weaker economic data and shifting monetary policy expectations. The S&P Global U.S. Services PMI, a key indicator for two-thirds of the U.S. economy, fell below 50, signaling contraction, while the Citi Economic Surprise Index turned negative for the first time in months. Concerns over Trump/Musk policy initiatives and their potential impact on employment, alongside discussions about a slowdown in the Fed's balance sheet runoff, added further support to Treasuries. Against this backdrop, U.S. government bonds continued their strong year-to-date performance. The iShares USD Treasuries ETF gained +0.3% last week, pushing its YTD return to +1.2%. The long end of the curve has been the standout performer, with February returns exceeding +2%, while TIPS surged +2.2% YTD on rising inflation expectations at the short end of the curve. Technically, yields are struggling to make new highs, while bond prices (iShares ETFs) have stopped hitting new lows. However, volatility remains elevated, with the MOVE Index—the bond market’s equivalent of the VIX—holding above 90, highlighting continued market uncertainty. The picture in Europe was more mixed, as German yields rebounded ahead of the weekend’s election. The 10-year Bund yield climbed 4bps to 2.47%, reflecting market uncertainty over fiscal policy shifts. The muted reaction to the CDU/CSU election win on Monday suggests investors are now focused on whether the new government can secure a coalition and amend the debt limit to boost fiscal spending. French and Italian spreads over German yields remained stable at 74bps and 109bps, respectively, but market participants remain cautious about the fiscal outlook in peripheral Europe. As a result, European government bonds underperformed, with the iShares Core EUR Govt Bond ETF slipping -0.2% last week. In Switzerland, government bonds continued to lag, with 10-year Swiss Confederation bonds down -2.3% YTD, while 5-year bonds fell -1.2%. Yields hovering near zero have reduced their attractiveness, while high hedging costs for foreign investors have further dampened demand. With only one more 25bp rate cut to 0.25% priced-in for 2025, expectations for further SNB easing are fading. Japan’s bond market also faced renewed selling pressure, as the 10-year JGB yield surged to 1.45%, marking its highest level since 2012. This drove the iShares Core JP Government Bond ETF down -0.7% last week and nearly -2% YTD, as markets brace for further BoJ policy tightening amid rising inflation pressures. With global central banks diverging in their policy paths and political uncertainty shaping fiscal trajectories, rate markets remain volatile—but for now, Treasuries continue to be the bright spot.

Emerging market

Sovereign Risks Weigh, While Corporate Issuers Show Strength.
Emerging market (EM) bonds delivered a mixed performance last week, with corporate bonds posting modest gains while sovereign bonds struggled amid elevated political and economic risks. The iShares Emerging Market Corporate Bonds ETF rose +0.2%, extending its year-to-date (YTD) gains to +1.9%, while sovereign bonds slipped -0.2%, bringing their YTD performance to +2.5%. Meanwhile, local currency EM bonds were flat for the week but remain the top performer in 2025, with the VanEck J.P. Morgan EM Local Currency Bond ETF up +3.7% YTD. Ukrainian bonds came under pressure, as the Trump administration withdrew its support for President Zelensky, raising uncertainty over future U.S. aid and geopolitical stability. The shift in foreign policy has led to widening spreads on Ukrainian debt, reflecting higher risk premiums. Ecuadorian bonds continued their sell-off, dropping another -9.3% week-over-week after last week's -11% decline. Investors are becoming increasingly concerned as socialist candidate Luisa González gains momentum ahead of the April 13 presidential runoff election. Markets fear a shift towards populist economic policies, which could threaten fiscal consolidation efforts and drive further volatility in Ecuador’s debt markets. Despite these setbacks, EM sovereign issuers remain active in primary markets. Several countries tapped the Eurobond market, including Qatar, Brazil. This activity brings total EM sovereign issuance to $72 billion year-to-date, the highest amount ever recorded for this period, reflecting strong investor demand despite ongoing macroeconomic uncertainties. EM corporate bonds remained relatively resilient, buoyed by solid credit fundamentals and robust demand. A key highlight came from Colombia’s Ecopetrol, which reported its largest increase in proven oil and gas reserves in three years. The company’s 1P reserves rose to 1.89 billion barrels of oil equivalent, up from 1.88 billion barrels in 2023, extending its reserve life to 7.6 years of consumption. The news reassured investors, as concerns over Colombia’s energy self-sufficiency have been a hot political issue amid dwindling domestic gas supplies. Ecopetrol bonds remained stable, reflecting strong fundamentals and continued investor confidence in the region’s largest energy company. Overall, EM corporate credit remains well-supported, benefiting from lower net issuance, resilient demand, and selective opportunities in high-quality names. However, political risks in Ecuador, Ukraine, and trade tensions with the U.S. remain key risks for investors navigating the EM fixed-income landscape.


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

A Turning Point for China?      

20250224_cow

Source: Bloomberg

Chinese bond yields have surged since the start of the year, signaling growing optimism about the country's economic trajectory. The 2-year Chinese government bond yield has jumped from 1.0% to 1.5%, while the 10-year yield climbed from 1.6% to 1.8%, marking the sharpest rise in over a year. This upward movement is the result of a convergence of internal and external factors. Indeed, early signs of a nascent economic recovery have emerged, particularly in the tech and consumer sectors, where equity markets are rallying. The PBoC has also maintained a supportive stance, ensuring ample liquidity in the financial system. While still subdued, inflation has ticked up, reducing deflationary fears and reinforcing the idea that demand is improving. The strong rebound in Chinese tech stocks aligns with this yield movement, suggesting that investors are beginning to price in a more sustainable recovery. But the key question remains: Is this the start of a genuine growth rebound, or just another short-lived uptick?

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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