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What happened last week?
Monetary policy outlooks grew even murkier last week, as mixed economic data and ongoing tariff threats deepened the challenge for central banks already walking a fine line between supporting growth and containing inflation. The potential fallout from U.S. tariffs remains the key wild card, weighing on sentiment indicators, fueling inflation expectations, and casting a long shadow over global policy paths. In the U.S., investors faced a whirlwind of conflicting signals. Early signs of resilience in March’s services activity and a seemingly softer tone from President Trump on upcoming tariffs briefly eased fears, pushing down rate cut expectations. But this optimism quickly faded after a string of disappointing data: weak consumer confidence, firm core PCE inflation, and sluggish consumption. Fed officials, now in full “wait-and-see” mode, underscored the uncertainty. Atlanta Fed President Bostic warned of the unclear inflation dynamics from tariffs, while Barkin pointed to the risk of demand softening from falling sentiment. By week’s end, futures markets reversed course, pricing in nearly three 25bp rate cuts by year-end (–70bps), back in line with levels from one week prior. In the Eurozone, softer PMIs and a decline in economic sentiment highlighted the region’s vulnerability to U.S. protectionist measures. While some ECB members maintained a cautious tone on inflation (Wunsch, Muller), the market shifted dovishly, with expected ECB cuts rising to –60bps by year-end (vs –52bps the prior week). In Switzerland, with no major domestic data, SNB expectations followed the broader trend. Markets now assign a 50% chance of one more 25bp cut this year—up from zero a week ago. In the UK, February inflation surprised to the downside, but with levels still above target, rate cut bets remain capped at just two 25bps moves. Meanwhile, in Japan, Tokyo CPI came in hot once again, reinforcing inflation risks. Yet, BoJ tightening expectations were unchanged, as global growth concerns keep a lid on rate hike projections—markets still price just over one 25bp hike by year-end. As trade policy continues to disrupt the macro picture, central banks are left with little choice but to stay reactive, data-dependent, and cautious.
Credit markets were on edge last week following President Trump’s announcement of a 25% tariff on auto imports, with markets now bracing for reciprocal trade measures to be revealed on “Liberation Day,” April 2nd. The heightened uncertainty triggered a broad-based widening in credit spreads, with investment grade (IG) outperforming high yield (HY) in both the U.S. and Europe. Only EUR IG credit delivered a positive total return last week, buoyed by a supportive move in rates. Spreads widened modestly by 2bps to 92bps—still 2bps tighter than their U.S. counterparts—helping the iShares Core Euro IG Corporate Bond ETF rise +0.3% on the week (-0.1% YTD). Strong demand, stable fundamentals, and a potential ECB backstop provide a more constructive backdrop for European credit, particularly as political uncertainty and fiscal expansion reshape investor sentiment. S&P’s upgrades of Spanish lenders Caixabank and Sabadell further highlight the improving credit profile in parts of the European banking sector. In contrast, U.S. IG spreads widened by 2bps to 94bps, reversing the previous week’s tightening. The Vanguard USD Corporate Bond ETF slipped -0.1% for the week, bringing its YTD return to +1.8%. More notably, U.S. HY credit came under pressure, with spreads widening sharply by 26bps to 347bps amid concerns over the economic fallout from trade tensions and weaker growth. The iShares Broad USD High Yield ETF fell -0.5%, trimming its YTD return to +0.9%. EUR HY proved relatively more resilient, with spreads widening by 19bps to 327bps. The iShares Euro HY ETF declined -0.3% on the week, but remains up +0.6% YTD. In high-beta segments, European corporate hybrids edged down just -0.1% (+0.4% YTD), while the WisdomTree AT1 CoCo ETF dropped -0.4% (+1.2% YTD). Deutsche Bank’s decision not to call a 2014-issued USD AT1 bond caught investor attention, reminding markets that redemptions are not automatic but hinge on economic rationale—including FX and reset dynamics.
Government bond markets were mixed last week as global investors continued to grapple with conflicting macro signals and rising policy uncertainty. European sovereign bonds outperformed U.S. Treasuries, with the 10-year German Bund yield falling 4bps to 2.72%, while the U.S. 10-year Treasury yield ended the week flat at 4.24%. One of the most striking developments was the steepening of the U.S. yield curve. The spread between 5- and 10-year Treasury yields reached 67bps—the steepest level since December 2021. This move reflects growing uncertainty, with the U.S. Economic Policy Uncertainty Index hitting its highest reading since 2020. Real yields in the front and intermediate parts of the curve declined sharply, suggesting that investors are increasingly hedging against downside growth risks, even as long-end yields remained stable. In this context, shorter-dated bonds outperformed. The iShares 3–7 Year Treasury Bond ETF gained +0.2% last week (+0.6% in March), while the iShares 10–20 Year Treasury Bond ETF slipped -0.3% last week (-0.5% in March). Inflation-linked bonds continued to shine, with the iShares USD TIPS ETF now up +3.9% YTD, outperforming the broader iShares USD Treasuries ETF (+2.5% YTD). In Europe, despite a modest rebound last week, March was a tough month overall for bonds. The iShares EUR 3–7 Year Government Bond ETF lost -0.45% in March (+0.4% last week), while longer-duration bonds fared worse—the iShares EUR 10–15 Year ETF dropped nearly -3% in March (+0.3% last week). A pronounced steepening of the European curve reflects both ECB rate cuts and rising long-term yields amid renewed fiscal expansion via infrastructure and defense spending. YTD, short-term EUR bonds remain in positive territory (+0.2%), but the long end is down -2.4%. Elsewhere, Swiss government bonds continue to underperform, with the iShares Swiss 3–7 Year ETF down -0.8% YTD, pressured by what is likely the SNB’s final rate cut. In the UK, despite improving inflation data, the iShares UK Gilt ETF is only slightly positive YTD (+0.1%), with the 10-year yield up 15bps to 4.7%. Meanwhile, Japan saw a notable jump in yields, with the 10-year rising 40bps YTD to 1.55%, reflecting expectations of a gradual BoJ normalization.
Emerging market
Emerging market (EM) bonds delivered mixed performance last week, reflecting growing caution amid rising geopolitical tensions and concerns over U.S. trade policy. While local currency bonds remained the standout performers, hard currency sovereign debt posted a sharp pullback, highlighting investor nervousness around global growth and tariffs. The Bloomberg EM Hard Currency Aggregate Index fell -0.27% last week and -0.43% for the month, though it remains up +2.26% YTD. Sovereign bonds led the decline, with the iShares EM Sovereign Bond ETF dropping -0.65% WTD and -1.43% MTD, despite a solid +2.44% YTD return. The move was largely driven by risk-off sentiment following Trump’s tariff announcement on auto imports and growing fears of retaliatory measures. With “Liberation Day” on April 2nd looming, markets are bracing for volatility, particularly in EM sovereigns seen as more exposed to global trade flows. EM corporate bonds, by contrast, proved more resilient. The iShares EM Corporate Bond ETF declined only -0.15% WTD (-0.21% MTD), while maintaining a healthy +2.59% YTD gain. Stronger credit fundamentals, stable earnings, and lower net issuance continue to support EM corporates as a relative safe haven within the asset class. Meanwhile, local currency EM debt continues to outperform thanks to supportive central bank policy and improving domestic dynamics. The VanEck JP Morgan EM Local Currency Bond ETF rose +1.10% in March and is now up +4.06% YTD, despite a modest -0.46% WTD pullback driven by weaker EMFX performance. Demand remains robust, particularly in Latin American markets where disinflation trends have opened the door for rate cuts. In Asia, the iShares USD Asia High Yield Bond ETF gained +0.59% in March and +3.48% YTD, despite being flat last week (-0.15%). The rally has been supported by improving sentiment toward Chinese property issuers and continued policy support from Beijing aimed at stabilizing credit markets. Looking ahead, EM performance will remain highly sensitive to global trade rhetoric, upcoming U.S. data releases, and investor appetite for risk as volatility creeps higher.
