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What happened last week?
The Federal Reserve’s FOMC delivered a 25bp rate cut to 3.75–4.00% and announced that Quantitative Tightening will fade in November, ending on December 1. While these moves matched expectations, Chair Powell’s hawkish tone surprised markets. He stressed that a December cut is “not a foregone conclusion – far from it,” citing “strongly differing views” within the committee. Two members dissented in opposite directions. Markets quickly repriced the odds of another cut toward 65% (from close-to-certain). Powell also noted that economic growth may be on a “firmer trajectory,” adding uncertainty to the policy outlook.
The ECB kept rates unchanged at 2% for a third straight meeting. President Lagarde described policy as “in a good place” but “not a fixed place,” signaling readiness to adjust if needed. Growth data turned slightly positive, with strength in the periphery offsetting Germany’s weakness.
The BoJ held its rate at 0.5%, with two members dissenting in favor of a hike. Inflation forecasts were revised higher, with 2% core inflation now expected by FY2027. Policy independence remains under scrutiny amid Japan’s new government. The RBA also held its key rate unchanged at 3.60%.
Upcoming meetings include the Riksbank on Wednesday and the Norges Bank and BoE on Thursday. The BoE’s decision is the key event, with markets split—pricing a 30% chance of another quarter-point cut.
Credit spreads widened and Treasury yields surged after Chair Powell’s hawkish comments at the last FOMC meeting, weighing heavily on total returns across US credit markets. US investment grade widened by 3 basis points (bp) week-over-week to 80bp, though sentiment remained supported by a robust earnings season despite heavy AI-related issuance. Meta Platforms’ record-breaking $30 billion bond sale drew $125 billion in orders — the largest order book in history. The ongoing AI investment cycle remains a major catalyst not only for equities but also for corporate bond supply (see Syz Focus Note_FAQ: AI Capex Wave from Credit Lens).
US BBs outperformed US BBBs, as concerns over regional banks’ credit risks eased. Most regional banks reported stable results and do not see red flags in lending books. Fraudulent exposures at Zion and Western Alliance were viewed as idiosyncratic cases.
Third-quarter earnings season is off to a strong start, despite limited macro data releases during the U.S. government shutdown. U.S. high-yield funds also recorded renewed inflows after two weeks of outflows.
In Europe, the ECB left rates unchanged. Low-interest rate have supported the EUR credit bull market. Historically, EUR investment-grade real estate and industrial sectors outperformed during ECB pause periods. In October, non-financials outperformed financials.
By contrast, GBP-denominated corporate bonds lagged, weighed down by uncertainty ahead of the U.K. budget and ongoing political instability. Valuation opportunities may emerge once the outlook clears.
Market performance was mixed. U.S. investment grade fell 0.7% (Vanguard USD Corporate Bond ETF) and US high yield was down 0.3% due to higher U.S. Treasury yields. EUR investment grade was flat, and EUR high yield inched up 0.1%, supported by stable German bund yields.
We expect credit spreads to remain range-bound amid resilient corporate fundamentals. Following the strong third-quarter earnings season, November is likely to see a wave of heavy bond issuance.
US Treasury yields rose across the curve last week as markets reassessed the Federal Reserve’s policy outlook following the FOMC’s rate cut and Chair Powell’s unexpectedly hawkish tone that drove a bear flattening in the US curve. The 2-year yield rose 9bps to 3.57%, while the 10-year climbed 8bps to 4.08% (+7.5bps on the week, but –2.1bps on Friday as sentiment steadied). The 30-year yield increased 6bps to 4.65%. Breakeven inflation widened slightly (+2bps), while the 10-year real yield advanced 6bps to 1.76%, underscoring tighter financial conditions.
In Europe, sovereign bond markets moved in mixed fashion. German Bund yields were broadly unchanged (10-year +1bp to 2.63%), while French OATs and Italian BTPs eased modestly (–1bp and –3bps, respectively). Peripheral spreads narrowed slightly, supported by stable ECB guidance and improving euro area growth data.
In the UK, gilt yields dipped 2bps to 4.41% ahead of this week’s Bank of England meeting, where expectations remain finely balanced. Japanese 10-year yields edged up 1bp to 1.67% as inflation expectations continued to firm.
Bond total returns reflected the upward yield shift: US Treasury ETFs declined between –0.16% (1–3y) and –1.29% (20y+), while euro-area government bond ETFs posted modest gains (+0.07% to +0.26%).
Emerging market
Emerging Market (EM) sovereign dollar bonds advanced last week. Argentina was the standout performer following the surprise victory of Javier Milei’s party in the midterm legislative election. Other high-yield sovereigns also performed strongly, notably Ivory Coast and South Africa. In Ivory Coast, President Alassane Ouattara, 83, secured re-election with over 90% of the vote, marking a fourth consecutive term. The smooth electoral process and absence of post-election unrest have reassured the market.
U.S: President Trump announced an agreement in principle with Chinese President Xi. Under the deal, China will increase imports of U.S. soybeans and refrain from restricting rare-earth exports, while the U.S. will reduce select tariffs on Chinese goods to 10% from 20%. The agreement, valid for one year with an option to renew, temporarily eases tensions but falls short of a comprehensive resolution.
The U.S. also signed new “Technology Prosperity Deals” (TPDs) with Japan and South Korea aimed at strengthening advanced-technology supply chains and reducing operational bottlenecks. The U.S.–Korea accord includes a tariff cut on Korean autos and auto parts—from 25% to 15%—a positive development for Hyundai Motor and the broader Korean export sector.
EM Sovereign USD Bond ETF was up +0.4% and EM USD corporates was flat. The J.P. Morgan EM Local Currency Bond ETF declined modestly 0.1%., while Asian high yield rose +0.2%.
For now, emerging markets should remain on a stable-to-positive trend as long as the Fed continues to cut rates and inflation pressures stay contained.
