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What happened last week?
Last week saw a continued global trend of monetary easing, with 71% of major central banks now cutting rates—the highest level since the COVID-19 pandemic in 2020. In the U.S., Federal Reserve officials displayed a mixed tone regarding future rate cuts. Atlanta Fed President Raphael Bostic emphasized patience, stating that he is not in a hurry to reduce rates further, particularly given the importance of reaching the Fed’s 2% inflation target. He underscored that the current rate is still above the neutral level, which he estimates to be between 3% and 3.5%, and noted that rates would continue to fall only if inflation and the labor market remain stable. Meanwhile, Federal Reserve Bank of San Francisco President Mary Daly expressed optimism about the current economic trajectory but stressed the need for continued vigilance. Daly highlighted that the U.S. labor market has cooled but remains robust, benefiting from extended growth and high labor force participation. While she acknowledged that inflation is declining, Daly reiterated the importance of balancing the Fed’s dual mandate—controlling inflation and maintaining full employment. She mentioned that the central bank is likely to reduce borrowing costs by another 50 basis points over the remainder of the year, with one or two more quarter-point cuts expected in 2024. Market expectations remain stable, with a 90% probability of a rate cut in November and an 80% chance of another reduction in December. Across the Atlantic, the European Central Bank (ECB) implemented its third rate cut this year, lowering the deposit rate by 25 basis points to 3.25%. This move followed inflation in the eurozone falling below 2% for the first time since 2021, giving the ECB more room to support the economy. However, ECB President Christine Lagarde maintained a cautious stance, warning of ongoing economic risks but downplaying the likelihood of a recession, projecting instead a "soft landing." The market is now pricing in the possibility of a more aggressive cut, with a 30% chance of a 50bps reduction in December. Meanwhile, in the UK, expectations of a rate cut at the Bank of England’s next meeting in November solidified after CPI data came in lower than anticipated.
For the first time since 2005, U.S. Investment Grade (IG) corporate spreads briefly dipped below 80 basis points before closing the week unchanged at 81 bps. This development is particularly remarkable given that IG net dealer positioning is at record negative levels, yet liquidity in the IG market remains robust. Both turnover and bid-ask spreads are at their best levels since the Global Financial Crisis, indicating continued market efficiency despite challenging conditions. As a result, the Vanguard USD Corporate Bond ETF was flat for the week. In the U.S. high-yield (HY) space, spreads tightened by 8 bps to 286 bps, leading to a +0.3% gain for the iShares Broad USD High Yield Corporate Bond ETF. Notably, Goldman Sachs released its supply forecast for U.S. IG and HY issuance, predicting a flat IG volume in 2025 at $1.65 trillion, while HY issuance is expected to increase by nearly 30% to $350 billion. This rise is driven by elevated refinancing needs in HY, with the share of near-term refinancing (18-36 months) expected to be the highest since 2010, at about 25%. In Europe, IG corporate spreads tightened to 105 bps, their lowest level since 2022. While spreads remain far from their pre-2008 level of 50 bps, European credit continues to face challenges from the deteriorating economic environment and the ongoing energy crisis linked to the Russia-Ukraine conflict. However, spreads across ratings have compressed to their tightest levels since 2015. In this context, the iShares Core Euro IG Corporate Bond ETF gained +0.7% last week and is up +3.7% year-to-date. European high-yield spreads remained flat at 348 bps, despite a stronger-than-expected set of European economic data. The iShares Euro HY Corporate Bond ETF posted a gain of +0.4%, supported by the solid performance of European CCC-rated bonds, which gained +1.2% and are now up more than 11% year-to-date. Other high-beta European fixed income segments also performed well, with subordinated debt, both corporate (Invesco Euro Corporate Hybrid ETF) and financial (WisdomTree AT1 CoCo Bond ETF), each gaining +0.8%.
Last week, U.S. Treasury markets stabilized, after a difficult start to the month, largely due to an 8.4% drop in oil prices. This decline was driven by easing concerns over potential disruptions to oil supplies in the Middle East following Israel-Iran tensions. As a result, U.S. breakeven rates, which are highly sensitive to oil price fluctuations, decreased by around 5 bps on average, while real rates remained relatively flat. The iShares USD Treasuries ETF was mostly stable, gaining +0.1% for the week, though it remains down -1.5% for October. Meanwhile, the iShares USD TIPS ETF dipped slightly by -0.1%. The MOVE Index, which measures U.S. Treasury market volatility, reached its highest point of the year, reflecting a mix of factors including uncertainty about the terminal rate in this tightening cycle, the upcoming U.S. elections, fiscal policy concerns, and ongoing geopolitical tensions pushing oil prices higher. In Europe, Italy saw some positive momentum as Fitch Ratings revised the country’s credit outlook from stable to positive, affirming its long-term foreign currency issuer default rating at BBB. This outlook shift comes in light of better-than-expected fiscal performance, political stability, and improved economic growth prospects. The spread between Italian and German 10-year bonds narrowed to 117 bps, the lowest level since 2021. This was supported by the European Central Bank's third rate cut and lower-than-expected September CPI figures for the Eurozone, leading to solid performance in European government bonds. The iShares Core EUR Govt Bond ETF gained +1% last week, bringing its year-to-date performance to +2.1%, which is close to matching U.S. Treasuries (+2.3% ytd). However, French government bonds remain under pressure. The spread between Italian and French 10-year yields reached its lowest point, 45bps, since 2010. After a recent downgrade by Scope Ratings to AA-, French bonds are struggling due to concerns over the country’s public finances and political instability. The yield on French 10-year bonds has risen above those of Belgium and even Spain, suggesting that investors are pricing in further potential downgrades ahead of reviews by Moody’s and S&P. In the UK, Gilt markets rallied, with a notable bull-steepening in the yield curve, the 2-year yield decreased by 18bps last week, as additional Bank of England easing was priced in following a larger-than-expected decline in inflation. The iShares Core UK Gilts ETF gained +1.4% last week, though it remains slightly negative for the year at -0.2%.
Emerging market
Emerging market (EM) bonds had a stable week, with spreads consolidating after a strong start to the month. EM corporate spreads ended unchanged at 207 bps, while EM sovereign spreads tightened slightly by 2 bps, closing at 276 bps. This modest tightening supported gains in the iShares Emerging Market Sovereign Bonds ETF and the iShares Emerging Market Corporate Bonds ETF, both of which rose +0.3% over the week. However, local currency debt was negatively impacted by the strengthening U.S. dollar, leading the VanEck J.P. Morgan EM Local Currency Bond ETF to lose more than 1%. In specific country developments, Poland successfully tapped the euro bond market, raising €3 billion, demonstrating strong investor demand. Meanwhile, in China, the government pledged to nearly double the loan quota for unfinished residential projects to 4 trillion yuan ($562 billion) in an effort to halt the sector’s decline. Additionally, China is considering allowing local authorities to issue up to 6 trillion yuan in bonds through 2027 to refinance off-balance-sheet debt, signaling further support for the economy. In the private sector, Sunac China Holdings Ltd. announced plans to raise approximately HK$1.2 billion through an equity placement, marking its first fundraising move in a year. In Turkey, the Central Bank of Turkey (CBT) kept its policy rate unchanged at 50%, as anticipated. The bank’s tone turned slightly more cautious, citing uncertainty regarding the pace of inflation improvements. While November seems off the table for a rate cut, the door remains open for potential easing in December if inflation data allows. In Brazil, Gerdau, the steel manufacturing giant, received an upgrade to BBB from S&P, reflecting its improved financial stability. In Mexico, recent legislative developments regarding PEMEX reclassified the state oil company as a public company, allowing for more government oversight and eliminating the need for profitability. This shift, coupled with anticipated capital injections, has been viewed positively by investors, as it suggests stronger government support and potential bond market attractiveness. Fitch has noted that PEMEX's credit rating could rise by up to four notches depending on the final structure of government guarantees, making its bonds nearly sovereign-level in attractiveness.
