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What happened last week?
The power struggle between the Trump Administration and the Fed continued this week. President Trump is pushing for a rapid confirmation of Stephen Miran to fill a vacant seat till January 2026, and Treasury Secretary Bessent declared that there was a good chance Miran will be seated before the September 17th Fed meeting. The current Chair of the President’s Council of Economic Advisors faced a Senate Banking Committee hearing ahead of the vote for his appointment, in which he defended his independence when Democrats pointed his strong links with President Trump.
However, following the release of weak August employment data, the support of an additional FOMC member may not even be required for the Fed to cut its key rate on September 17th. The slowdown in the US job market, emphasized by Jerome Powell in his Jackson Hole speech, has been shifting the balance of risks for the Fed in the past month. Maintaining the current mildly restrictive monetary policy stance increasingly creates risks of creating an unwarranted economic growth slowdown. Following the Employment Report release, future markets raised their expectations for Fed rate cuts in the coming months: a 25bp cut is now fully priced in for the September 17th meeting, and two other 25bp cuts at the October and December meetings are now also almost fully priced by future markets.
In Europe, inflation data slightly above expectations and activity indices marginally revised lower for August barely affected expectations around future ECB actions. Following its June rate cut to 2.0%, the ECB is most likely done with its monetary policy easing cycle and will keep its key rate unchanged this week (September 11th). The probability of a 25bp cut by the end of the year hovers around a modest 35%. The quarterly update on inflation and economic growth projections will shed more light on the likely path of ECB rates in the medium term. Interestingly, ECB Board Member Schnabel stated this week that “global rate hikes may start earlier than expected”, which would be an unexpected development when looking at current bond market expectations.
Other European central banks will also hold their monetary policy later this month: the Bank of England and the Norgesbank on September 18th, the Swedish Riksbank on the 23rd and the Swiss National Bank on the 25th. The Norgesbank might cut its key rate by 25bp this month, while the others are expected to leave their rate unchanged in September before possibly cutting rate again later in Q4. Future markets are pricing in around 40bp of rate cut by year end for the BoE, and one 25bp cut for the SNB and the Riksbank.
For its part, the National Bank of Poland last week cut its key interest rate by 25 basis points to 4.75%.
Credit markets continued to attract solid interest from investors, despite a flood of supply on the primary market.
USD and EUR Investment Grade credit spreads tightened marginally (-1bp) last week, respectively to 80bp and 82bp. They continue to evolve at tight levels from an historical perspective, but the economic environment can steel be deemed as supportive for credit in general. The combination of resilient economic growth supported by accommodative fiscal policies across all developed economies, lower short-term rates and declining government yields supports credit fundamentals and the relative value of credit vs govies.
The Vanguard USD Corporate Bond ETF was up +1.5% last week, while the iShares Core Euro IG Corporate Bond ETF was up a milder +0.5% (due to less contribution from the rate component).
USD and EUR High Yield also had a positive week, but the returns were mostly driven by the decline in yields. USD HY credit spreads were stable at 284bp while EUR HY spreads slightly widened (+4bp to 292bp). The iShares Broad USD High Yield Corporate Bond ETF rose by 0.5% and the iShares Euro HY Corporate Bond ETF edged marginally higher (+0.1%).
US Treasury rates fell at the end of last week following the release of US employment data confirming the weakening of the labor market already pictured the previous month. Yields declined across the entire curve as not only investors were pricing more Fed rate cuts in the coming months, but also grew concerned about the medium-term growth outlook, which also led to a pullback in inflation expectations.
The entire USD yield curve shifted lower last week, with a more pronounced movement on longer maturities partly driven by declining inflation breakeven (-4bp for the 10-year US Treasury inflation breakeven rate, to 2.37%). The US Treasury 2-year and 5-year yields declined by 11bp, respectively to 3.51% and 3.58%, while the 10-year nominal yield was down -15bp to 4.07% (its lowest level since early April’s Liberation Day) and the 30-year fell 17bp to 4.76%.
As a result, performances were positive for US Treasury ETFs last week, led by longer-maturity ETFs that benefited both from a larger decline in rates and for their higher sensitivity to yields’ changes (duration). The iShares Treasury 20y+ jumped +2.3%, the 10-20y was up +1.6% while the 3-7y ETF rose a smaller +0.7% and the 3-7y was marginally up (+0.2%). With the decline in inflation expectations, TIPS slightly underperformed nominal bonds last week (iShares USD TIPS ETF +0.85% vs +1.17% for the iShares USD Treasuries ETF).
The downward trend in rates was also visible on this side of the Atlantic, although to a milder extent as weaker economic activity indicators were balanced by a slightly firmer than expected inflation report for August. EUR sovereign spreads edged back lower as the political situation in France did not escalate further and led investors to adopt a wait-and-see approach ahead of the confidence vote and the potential consequences for France’s public debt dynamic.
EUR short-term rates were only marginally lower while longer-term maturities declined: the German Bund and French OAT 10-year fell by -6bp, respectively to 2.66% and 3.45%, while Italian and Spanish 10-year government yields were down -8bp respectively to 3.50% and 3.25%. UK Gilt 10-year yields were also down -8bp (to 4.65%) while Swiss Government CHF 10-year yields were down a smaller -2bp to 0.29%. The iShares Core EUR Government Bonds ETF rose last week as a consequence (+0.8%).
Emerging market
Emerging Market bond markets resumed their march higher after a brief pause the previous week, fueled by lower USD rates. EM corporate spreads held broadly stable, while EM sovereign spreads widened somewhat.
However, the longer duration of the EM sovereign market meant that the weekly return of the iShares EM Sovereign bonds ETF was higher than the return of the iShares EM Corporate bonds ETF (+1.1% vs +0.6%).
Local currency EM bonds also had a positive week, with the JP Morgan EM Local Currency Bond ETF up +0.6%.
Asian High Yield had a solid positive week, with the iShares USD Asia High Yield Bond ETF up +0.9%.
