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What happened last week?
Uncertainty surrounding the global growth and inflation outlook continues to shape monetary policy expectations, with diverging signals emerging across major central banks. In the United States, early April business and consumer sentiment surveys revealed a deteriorating macro picture: economic activity is slowing, yet inflationary pressures are firming, likely reflecting early fallout from trade tensions. Against this backdrop, Fed Chair Jerome Powell adopted a notably hawkish tone, warning of risks that long-term inflation expectations could become de-anchored. While the Fed remains in wait-and-see mode, markets interpreted Powell’s stance as a sign that near-term rate cuts are off the table, but that easing may still come in the medium term as downside growth risks build. The probability of a June rate cut dropped from nearly 100% to 62%, while total cuts expected by year-end rose to -90bps, up from -75bps last week. Political pressure is also escalating, with President Trump calling Powell “too late” and publicly expressing his desire to replace the Fed Chair before his term ends in May 2026. In contrast, the ECB cut rates for the sixth consecutive meeting, citing ongoing disinflation and rising risks to growth due to global trade headwinds. President Christine Lagarde’s remarks leaned dovish, noting that traditional frameworks like the neutral rate are less relevant in today’s shock-prone environment. Markets responded by fully pricing in another 25bp cut in June, with two additional cuts likely in the second half of the year, taking the deposit rate to 1.50% by year-end. In the UK, soft inflation data paved the way for a more dovish BoE outlook. Markets now fully price in a 25bp cut for the May 8th meeting, with a total of -88bps of cuts expected by year-end. In Switzerland, a sharp appreciation of the Swiss franc has pushed rate expectations even lower, with more than one 25bp cut priced by June and negative short-term CHF rates expected for the second half of 2025. Meanwhile, the Bank of Canada paused last week after seven consecutive rate cuts, but markets still anticipate a resumption of easing over the summer, as growth risks remain elevated.
Credit markets rebounded last week, but beneath the surface, the divergence between U.S. and European markets continued to widen. In the U.S., investment-grade spreads tightened, yet dispersion across sectors increased—especially among industries most exposed to rising tariff threats. The geopolitical backdrop remains tense: China announced a halt to Boeing purchases, while Russia floated the idea of using sanctioned assets to buy U.S. aircraft. At the same time, early data suggest foreign investors have begun to trim their exposure to U.S. corporate bonds, a shift from the steady inflows of recent years, adding further pressure to the credit space. In contrast, the European credit market benefited from a relatively calmer inflation backdrop and more dovish monetary policy signals. The ECB’s flexibility to ease further, combined with the negative correlation between rates and spreads, helped cushion European credit from the worst of recent market volatility. Credit in the euro area appears better positioned for now, with less direct impact from U.S.-China trade tensions. Despite these diverging dynamics, both markets participated in a relief rally. U.S. investment-grade spreads narrowed by 7 basis points to 111bps, and the Vanguard USD Corporate Bond ETF bounced back with a 2.0% weekly gain, recovering from the prior week’s loss and returning to positive territory for the year at +1.0%. European IG spreads compressed in parallel by 8 basis points to also settle at 111bps, with the iShares Euro IG ETF up 1.1% last week, bringing its year-to-date performance to +0.8%. High yield markets also rallied. In the U.S., HY spreads tightened by 24bps to 402bps, while the iShares USD HY ETF gained 1.5% over the week, stabilizing its YTD performance. European HY spreads followed closely, tightening by 25bps to 387bps, and the iShares Euro HY ETF advanced by 1.7%, lifting its YTD return to +0.3%. The high-beta segments saw strong follow-through, with European corporate hybrids rising by 1.5%, building on their previous week’s gain and now showing a modest 0.4% year-to-date return. Meanwhile, the WisdomTree AT1 CoCo ETF rose by 2.0%, nearly erasing prior losses and bringing YTD performance back to -0.1%. While the rally offered some short-term relief, the broader environment remains volatile. Heightened uncertainty around global trade policies, central bank decisions, and geopolitical risks will likely keep credit markets—particularly those tied to global supply chains or foreign capital flows—under pressure in the weeks ahead.
After weeks of volatility, global rate markets diverged once again, with European government bonds staging a strong rebound while the U.S. curve experienced one of its sharpest steepenings in years. In Europe, a plunge in German yields led the rally. The 5-year German yield fell below 2% for the first time this year, driven by softer economic data and growing expectations that the ECB will continue easing beyond June. The rally pushed the Ishares EUR 3-7 Year Government Bond ETF up +1.5% month-to-date, while the longer-dated Ishares EUR 10-15 Year Government Bond ETF soared +2.36%. Switzerland followed the same trend, with the iShares Swiss Domestic Government Bond 7-15 ETF gaining +1.8% in April, supported by CHF strength and rising expectations of deeper SNB rate cuts. In contrast, U.S. Treasury markets remain under pressure. The yield gap between 10-year Treasuries and German Bunds widened to 195bps, the highest level since February, underscoring the divergence in monetary policy and inflation expectations across the Atlantic. A notable shift occurred in the shape of the curve: the 2s30s yield spread surged above 100bps, a level not seen since January 2022, reflecting deepening recession fears amid sticky inflation. Despite speculation about foreign selling, recent data reveals that U.S. investors have been the primary sellers of Treasuries—not foreign holders. Meanwhile, the U.S. swap spread remains abnormally inverted at -55bps, a sign that liquidity dislocations and structural stresses persist. Performance reflects the steepening: short/intermediate duration outperformed, with the iShares 3-7 Year Treasury Bond ETF up +0.2% month-to-date. In contrast, the iShares 10-20 Year Treasury Bond ETF remains under pressure, down -3.75% in April. With persistent curve distortion, uneven global policy responses, and ongoing macro uncertainty, the path for rates remains volatile—but for now, Europe is leading the bond rally while the U.S. remains on the defensive.
Emerging market
Emerging market (EM) bonds stabilized last week after a volatile start to April, benefiting from a pause in U.S. rate volatility and a partial return of investor risk appetite. While concerns around global trade tensions and slowing U.S. growth persist, improving technicals and easing rate pressures supported a modest recovery across several EM segments. After suffering significant outflows in early April, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) bounced back, gaining +1.7% on the week, trimming its month-to-date loss to -1.5% and maintaining a +1.1% YTD return. Spreads tightened slightly but remain elevated, with hard currency sovereign spreads still hovering above 300bps, reflecting lingering risk aversion, particularly in frontier names. On the corporate side, EM credit showed resilience. The iShares Emerging Market Corporate Bond ETF advanced +1.0% on the week, leaving it +1.2% YTD, despite wider U.S. spreads. Issuers in Latin America and Asia led the rebound, supported by positive earnings surprises and signs of improved liquidity. However, overall sentiment remains cautious, and issuance volumes remain muted. Local currency EM bonds also delivered positive returns, thanks to stable FX markets and softer U.S. yields. The VanEck JP Morgan EM Local Currency Bond ETF (EMLC) rose +0.9% on the week, extending its strong year-to-date performance to +6.1%. The asset class continues to attract flows as a relative safe haven within EM, particularly from investors seeking diversification outside hard-currency sovereigns. Regionally, Latin America outperformed, with Brazil and Mexico recovering ground, while CEEMEA sovereigns such as Ghana, Angola, and Kenya remained under pressure due to debt restructuring fears and funding constraints. In Asia, Indonesia and Philippines bonds rebounded, while China HY credit stayed fragile amid lingering property sector concerns. Despite the recent bounce, volatility is likely to remain elevated across EM, especially with trade policy still evolving and U.S. monetary policy path uncertain. However, the rebound in flows and prices suggests that EM investors are regaining selective risk appetite—especially where fundamentals remain sound and technicals supportive.Emerging market (EM) bonds stabilized last week after a volatile start to April, benefiting from a pause in U.S. rate volatility and a partial return of investor risk appetite. While concerns around global trade tensions and slowing U.S. growth persist, improving technicals and easing rate pressures supported a modest recovery across several EM segments. After suffering significant outflows in early April, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) bounced back, gaining +1.7% on the week, trimming its month-to-date loss to -1.5% and maintaining a +1.1% YTD return. Spreads tightened slightly but remain elevated, with hard currency sovereign spreads still hovering above 300bps, reflecting lingering risk aversion, particularly in frontier names. On the corporate side, EM credit showed resilience. The iShares Emerging Market Corporate Bond ETF advanced +1.0% on the week, leaving it +1.2% YTD, despite wider U.S. spreads. Issuers in Latin America and Asia led the rebound, supported by positive earnings surprises and signs of improved liquidity. However, overall sentiment remains cautious, and issuance volumes remain muted. Local currency EM bonds also delivered positive returns, thanks to stable FX markets and softer U.S. yields. The VanEck JP Morgan EM Local Currency Bond ETF (EMLC) rose +0.9% on the week, extending its strong year-to-date performance to +6.1%. The asset class continues to attract flows as a relative safe haven within EM, particularly from investors seeking diversification outside hard-currency sovereigns. Regionally, Latin America outperformed, with Brazil and Mexico recovering ground, while CEEMEA sovereigns such as Ghana, Angola, and Kenya remained under pressure due to debt restructuring fears and funding constraints. In Asia, Indonesia and Philippines bonds rebounded, while China HY credit stayed fragile amid lingering property sector concerns. Despite the recent bounce, volatility is likely to remain elevated across EM, especially with trade policy still evolving and U.S. monetary policy path uncertain. However, the rebound in flows and prices suggests that EM investors are regaining selective risk appetite—especially where fundamentals remain sound and technicals supportive.
