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What happened last week?
Fed Stays Patient, SNB Cuts as Expected, BoE Leans Hawkish!
Several key central banks met last week amid rising uncertainties for both growth and inflation outlooks. The U.S. Federal Reserve held rates steady, as expected, keeping the Fed Funds target range unchanged. For the second consecutive meeting, the Fed emphasized a cautious “wait-and-see” approach, as policymakers assess the economic implications of the new administration’s evolving fiscal strategy. While the Fed maintained a moderately restrictive stance, it surprised markets by announcing a slowdown in the pace of quantitative tightening, signaling a more supportive stance toward financial conditions. Updated projections from Fed members continued to show expectations for two 25bp rate cuts in 2025, and two more in 2026. However, markets reacted by pricing in a slightly more aggressive path, with nearly three cuts now expected this year (-71bps), amid growing concerns over stagflation. While this is not yet the Fed’s base case, the combination of softer growth and persistently high inflation risks is clearly on the radar. In Switzerland, the Swiss National Bank (SNB) lowered its key policy rate by 25bp to 0.25%, in line with market expectations. This move was justified by a notable decline in inflation, which now sits at the bottom of the SNB’s 0–2% target range. With inflation pressures largely subdued and the economy showing signs of resilience, the SNB’s easing cycle appears complete—markets now expect rates to remain on hold for the rest of the year. Meanwhile, the Bank of England also held its base rate at 4.50%, but struck a more hawkish tone. Only one of the nine MPC members voted for a cut, and the minutes highlighted persistent inflation concerns. Markets quickly adjusted, now pricing in fewer than two rate cuts by year-end (-46bps vs. -55bps prior). The Swedish Riksbank also held steady at 2.25%, while ECB expectations ticked slightly higher, with two cuts still priced in amid ongoing uncertainty around U.S. tariffs and their potential impact on Europe.
Credit Markets Rebound on Dovish Fed, But April 2 Tariff Risks Loom
Credit markets found their footing last week as dovish commentary from Fed Chair Powell helped ease investor concerns following the FOMC meeting. The tone reassured markets that the Fed remains flexible and data-dependent, leading to a broad-based tightening of credit spreads. U.S. investment grade (IG), U.S. high yield (HY), and European HY spreads all narrowed, while European IG held steady. The rally followed a risk-off tone the previous week, and highlights the resilience of credit markets when macro visibility improves—even temporarily. That said, geopolitical and trade policy risks remain front and center. The Trump administration has adopted increasingly combative trade rhetoric, suggesting a willingness to absorb near-term economic pain for longer-term strategic goals. Markets are now turning their attention to April 2nd—dubbed “Liberation Day” by Trump—when a new round of tariff announcements could arrive. This event is a potential flashpoint for credit markets, particularly for sectors exposed to trade or global supply chains, and may drive further spread divergence. In Europe, the macro backdrop remains relatively more constructive, and euro credit markets are benefiting from growing confidence in regional growth prospects and fiscal stimulus. EUR bank credit, in particular, offers compelling value, with credit spreads still lagging the strong rally in European bank equities. In terms of performance, U.S. IG spreads narrowed 2bps to 92bps, helping the Vanguard USD Corporate Bond ETF rise +0.2% on the week (+1.9% YTD). U.S. HY spreads retraced part of their recent widening, tightening 4bps to 321bps, while the iShares Broad USD High Yield ETF also gained +0.2% (+1.4% YTD).In Europe, EUR IG spreads held steady at 90bps—still 2bps tighter than U.S. IG—while the iShares Core Euro IG Corporate Bond ETF edged up +0.1% (-0.7% YTD). EUR HY spreads outperformed, tightening 6bps to 308bps, maintaining their edge over U.S. HY. The iShares Euro HY ETF gained +0.2% (+1.0% YTD). High-beta segments also recovered: the WisdomTree AT1 CoCo ETF rose +0.2% (+1.6% YTD), and European corporate hybrids gained +0.3% (+0.5% YTD).
Diverging Paths: U.S. Yields Fall While Europe Faces a New Era of Rising Borrowing Costs
Last week saw global bond markets moving in opposite directions, reflecting diverging economic and fiscal outlooks across regions. In the U.S., Treasury yields edged lower, with the 2-year slipping below 4% and the 10-year ending the week around 4.24%. The mid-part of the curve led the rally, while the long end lagged modestly. Markets took comfort in the Federal Reserve’s decision to maintain a cautious, data-dependent approach, with the Fed also announcing a slower pace of balance sheet runoff. Amid concerns over slowing growth and sticky inflation expectations, the iShares USD Treasuries ETF gained +0.4% on the week. In stark contrast, European bond yields continued their upward climb. German Bunds are undergoing a structural repricing, with the 10-year yield nearing 3%—and strategists now openly discussing a path toward 4%. This shift is being driven by Germany’s monumental €500 billion fiscal package, which will boost infrastructure and defense spending over the next decade. The proposed debt-financed stimulus is resetting expectations for Bund issuance and inflation, sparking upward pressure across the eurozone. As Germany leads this new era of fiscal expansion, borrowing costs have started rising across the bloc, with implications for heavily indebted countries like France, Italy, and Spain. Despite these pressures, the iShares Core EUR Government Bond ETF rose +0.7% last week, helped by ECB dovishness and technical support. In the UK, Gilt yields inched higher in sympathy with Europe, with the 10-year yield climbing toward 4.66%. A lack of clear BoE direction amid persistent inflation kept bond buyers on the sidelines, pushing the iShares Core UK Gilts ETF down -0.3%. Meanwhile, Japan saw one of the most dramatic moves. Long-end Japanese Government Bond yields surged, with the 30-year hitting 3%—a level unseen since its launch in 2007—as markets brace for a potential end to ultra-loose BoJ policy. The iShares Core JP Government Bond ETF declined -0.7%, extending its year-to-date losses.
Emerging market
Emerging Market Bonds Under Pressure Amid Rising Spreads and Political Risks
Emerging market (EM) bonds navigated a volatile backdrop of global macro risks and political instability to end the week mostly higher. Hard-currency EM debt posted modest gains (Bloomberg EM Hard Currency Aggregate Index +0.31%), with sovereign (iShares EM Sovereign Bond ETF +0.29%) and corporate (iShares EM Corporate Bond ETF +0.44%) segments both in positive territory. In contrast, local-currency bonds fell (VanEck J.P. Morgan EM Local Currency Bond ETF -0.58%) as EM currencies weakened. Notably, Asian USD high-yield bonds surged (iShares USD Asia High Yield Bond ETF +2.12%), reflecting improved risk appetite in higher-yield segments. Global conditions were relatively supportive – the U.S. Federal Reserve kept interest rates unchanged, tempering global yield moves – but idiosyncratic events drove dispersion across EM. Argentina’s sovereign bonds slid roughly 2%, making them the week’s worst performer, despite Congress approving a new IMF loan plan ; lingering economic and fiscal concerns kept investors cautious. Ukraine’s bonds also dipped (~-1.5%), as ongoing war risks and only tentative ceasefire talks continued to weigh on sentiment. Monetary policy paths diverged across major EMs. Brazil’s central bank delivered a hefty 100bps hike, lifting the Selic rate to 14.25%. The move – aimed at curbing resurging inflation – came at the cost of dampening growth prospects. In Turkey, political turmoil took center stage after Istanbul’s mayor, Ekrem İmamoğlu, was arrested, sparking the largest protests in over a decade. Turkish assets sold off sharply, with the lira plunging about 10% and forcing the central bank to intervene heavily with foreign reserves. Nevertheless, Turkish USD-denominated bonds proved resilient. Investors appear to view Turkey’s credit as attractive despite the political volatility, supported by improved fundamentals and disinflation momentum – with orthodox policies finally delivering positive real interest rates. This helped stabilize credit spreads despite the upheaval, underscoring EM investors’ focus on underlying macro trends even amid headline risks.
