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What happened last week?
Central bankers gathered last week in Sintra for the annual forum organized by the ECB, an opportunity for them to share updates on their views amid a rapidly evolving economic environment. While his position is increasingly threatened by President Trump, Chair Jerome Powell stated that the U.S. economy is strong, but that inflation will likely rise temporarily due to tariffs. He signaled that the Fed might have cut rates already if not for that risk and left the door open to a July cut. A data-dependent approach remains the path of choice, and reassuring employment data released last week later have since shut that possibility down, with no more than two 25bp cut now priced by the end of the year. Powell also warned about the unsustainable U.S. debt path, a few days ahead of the adoption of Trump’s Big Beautiful Bill, which did nothing to sooth Trump’s griefs toward the current Fed’s Chair.
The host of the forum, President Christine Lagarde, confirmed the eurozone has reached its 2% inflation target but stressed the need for vigilance, reaffirming a meeting-by-meeting strategy. Future markets continue to price in one last 25bp rate cut by the end of the year.
The Bank of England Governor Andrew Bailey said inflation pressures persist, though signs of economic and labor market softening are emerging. While policy remains restrictive, rates are expected to fall gradually, and future markets still expect a continuation of the quarterly 25bp cut pace.
Today the Reserve Bank of Australia met and surprised market participants by keeping its key rate unchanged at 3.85%, marking a surprise pause in its rate cut cycle initiated in February. The next meeting of the Fed and the ECB are scheduled at the end of the month.
Credit markets posted broad-based gains despite increased rate volatility last week, particularly across the U.K. Gilt market. Investor demand for corporate bonds remained firm and drove secondary market spreads tighter.
SoftBank’s $4.2 billion bond issuance—split across USD and EUR tranches—attracted over $17.3 billion in investor orders, making it more than four times oversubscribed.
Yield-sensitive investors, including insurance companies and pension funds, have been increasing allocations to corporate bonds. Conversely, eurozone government bonds experienced significant outflows over the past three weeks, with falling risk-free yields prompting a rotation out of safe havens and into higher-yielding assets.
The Fed announced proposed changes to the Supplementary Leverage Ratio (SLR) calculations, aiming to ensure capital requirements act more as a buffer than a constraint for G-SIBs (Global Systemically Important Banks). This increased flexibility should further support secondary market liquidity for corporate bonds.
In spread performance, US investment grade (IG) spreads tightened by 8 bps to 80 bps, while U.S. high yield (HY) compressed significantly by 22 bps to 280bps ahead of July 4 holiday.
EUR credits followed suit: EUR IG narrowed by 5bps to 85 bps while EUR HY by 14 bps to 305 bps.
In this supportive context, the U.S. IG bond ETF gained 0.2% (+3.8% year-to-date), with U.S. HY ETF up 0.5% (+4.9% YTD). Euro IG ETF also rose 0.4% (+2.2% YTD) and Euro HY ETF climbed 0.3% (+2.9% YTD).
Riskier segments led the rally: euro hybrid corporate bonds advanced 0.5% (+3.1% YTD), and Additional Tier-1 bank capital (AT1s) gained +0.6% (+4.3% YTD).
Looking ahead to the July 9 deadline, U.S. credit performance will be in focus this week. Beyond that, supportive summer technicals – characterized by seasonally lower issuance, especially in euros – may sustain the positive momentum in credit markets.
USD interest rates have strongly rebounded since the beginning of Jula, after having reached a 2-month low at the very end of June (4.23% on the UST 10y). A combination of factors contributed to pushing US yields higher. Reassuring data on US economic activity and the labor market lowered the probability of an acceleration in the Fed’s rate cut cycle. The adoption of the One Big Beautiful Bill Act will allow the US Treasury to resume issuance in the second half of the year with the lifting of the debt ceiling. And tariff-led inflation fears are back with the announcement of significant US tariffs imposed on several Asian economies. As a result, the US Treasury 10y rose back toward 4.40% and the USD yield curve shifted upward, fueled both by higher inflation expectations and rising real yields. The yield curve experienced a bear flattening, with short-term yields rising faster than longer maturities (2y +13bp to 3.88%, 10y +7bp, 30y +3bp). All segments of the US Treasury markets posted negative performance last week (iShares Treasury 3-7y and 7-10y -0.65%, 20y+-0.5%).
EUR long-term rates were also on the rise, extending their upward trend at play since mid-June, but short-and-medium maturities were noticeably lower on softer activity data, below-expectation inflation expectations and dovish comments from ECB members. The German 2y yield was down -4bp to 1.82% while the Bund 10y rose by +2bp to 2.61%. European sovereign spreads got slightly narrower. In this context, the European government bond market posted mild positive performance last week (iShares EUR Government Bonds 3-7y +0.2%, 10-15y +0.3%).
UK Gilts had a tumultuous week when rumors of the replacement of Chancellor of the Exchequer Rachel Reeves led investors to fear that the fiscal rules established by the Starmer government will be eased, leading to a surge in future borrowing. The Starmer government has struggled so far to cut spendings, repeatedly backtracking on some key initiatives. On the news, GBP yields jumped on Wednesday 2nd July (10y up +16bp) before falling back as the Prime Minister confirmed Chancellor Reeves in her position.
Emerging market
Emerging market (EM) sovereign dollar bonds extended their rally, as investors look beyond safe heaven into higher yielding investments. With spreads tightening broadly across the asset class, with Turkey and El Salvador among the top performers.
Romania unveiled a comprehensive package of spending cuts and tax increases to address its fiscal deficit, and the government will seek expedited parliamentary approval next week. Markets responded favorably to the new budget plan, with Romania’s sovereign USD bonds rallying on the news.
Trump threatens extra 10% tariff for “anti-American” BRICS policies. (BRICS: Brazil, Russia, India, China and South Africa).
Vietnam reached a framework deal with the U.S. on a 20 % tariff on most Vietnamese exports and a steeper 40 % tariff targeting “trans-shipments” (Chinese goods routed through Vietnam).
Indonesia is poised to sign an agreement to boost imports of U.S. fuels, agricultural commodities, and critical-minerals projects—to avert the looming 32 % U.S. tariff.
EM sovereign hard currency bond issuance reached $3.1 billion in June - the highest monthly level ever recorded for this period – yet strong investor inflows absorbed the increased supply.
EM local bonds continued their strong performance, buoyed by a weak dollar.
EM government bonds delivered solid returns in both local currency and USD. The VanEck J.P. Morgan EM Local Currency Bond ETF rose 1.0% last week, while the benchmark EM USD sovereign bond index advanced 0.7%.
EM corporate bonds edged up 0.2%, and the iShares USD Asia High Yield Bond ETF climbed 0.4%.
