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What happened last week?
The Federal Reserve kept interest rates unchanged at 4.25–4.50% last week, maintaining its wait-and-see approach amid rising dual risks: stickier inflation and signs of a cooling labor market. Chair Jerome Powell reiterated the Fed’s commitment to policy flexibility, pushing back against calls for pre-emptive cuts. While economic uncertainty—fueled by ongoing trade tensions—remains elevated, Powell emphasized the need to preserve the Fed’s credibility by balancing the inflation mandate with labor market resilience. Fed officials echoed this cautious tone throughout the week. Governor Waller defended the institution’s independence, alluding to recent political pressure from President Trump, who has renewed his criticism of Powell’s leadership. Richmond Fed President Barkin warned that consumer demand is weakening, limiting companies’ pricing power in the face of tariff-induced cost pressures. Meanwhile, Governor Kugler and NY Fed President Williams both stressed the importance of anchoring inflation expectations and pointed to continued strength in underlying growth as justification for policy patience. Futures markets have adjusted accordingly: a June rate cut is no longer priced in, but two 25bp cuts—one in Q3 and one in Q4—are still expected by year-end. In the UK, the Bank of England delivered a 25bp rate cut, bringing the base rate down to 4.25%. The decision came through a rare 5–2–2 split vote, underscoring growing internal divergence. Governor Andrew Bailey framed the split as a sign of healthy debate, while Chief Economist Huw Pill acknowledged the complexity introduced by global factors, particularly U.S. trade policy. Although the new UK–U.S. trade agreement was welcomed politically, its near-term macro impact is viewed as limited. Markets, expecting a more aggressive path, scaled back easing bets following the cautious tone of the decision. A pause is now expected at the June meeting, with two further cuts likely in H2. In the Eurozone, several ECB members reiterated their dovish outlook. The drag from U.S. tariffs and a strong euro continues to weigh on industrial activity and inflation prospects. Markets now fully price a 25bp cut at the June 5 meeting and at least one additional cut by year-end, reinforcing expectations of a prolonged easing cycle.
Credit markets rallied last week as a renewed wave of risk appetite followed the first trade breakthrough since the April 2 tariff escalation. The U.S. signed a bilateral agreement with the UK on Thursday, and the announcement of a “productive” meeting between Treasury Secretary Bessent and China’s Vice Premier over the weekend further boosted sentiment. This backdrop catalyzed a spread tightening across both U.S. and European credit markets, with high yield and high-beta segments leading the move as investors rotated into riskier parts of the credit spectrum. In Europe, momentum was also supported by merger optimism. Fitch placed BBVA and Sabadell on Rating Watch Positive after receiving Spanish antitrust approval for their merger, which would create the country’s second-largest domestic lender. The deal highlights ongoing consolidation trends in the European banking sector and has been viewed as credit-positive. On the supply side, Reverse Yankee issuance continues to surge. With euro funding costs falling below those in USD, U.S. corporates are increasingly tapping the EUR market. Year-to-date issuance has already surpassed €60 billion—well above last year’s pace and on track to reach the highest annual total since 2010. This technical trend adds depth and diversity to the European credit market. Spreads continued to tighten across the board. U.S. investment grade (IG) compressed 4bps to 102bps, with the Vanguard USD Corporate Bond ETF unchanged on the week and +1.4% year-to-date. European IG mirrored this, tightening to 104bps, with the iShares Euro IG ETF gaining +0.1% and reaching +0.9% YTD. European credit outperformed in total returns. In high yield, U.S. spreads narrowed by 7bps to 353bps. However, the iShares USD HY ETF slipped -0.1%, reflecting some caution in performance metrics despite positive sentiment. European HY, by contrast, tightened sharply by 16bps to 349bps and the iShares Euro HY ETF gained +0.4%, bringing its YTD return to +1.5%. High-beta segments also extended gains. European corporate hybrids rose +0.3% (YTD +1.2%), while the WisdomTree AT1 CoCo ETF advanced +0.8%, lifting its YTD return to +2.0%. Despite the rally, caution remains warranted. Rate volatility is still elevated, and the full earnings impact of recent economic softness has yet to surface. Clear progress on trade is key to restoring confidence and reducing the risk of downside surprises ahead.
U.S. Treasury yields remained broadly stable last week, with the 10-year yield hovering around 4.37%, as markets welcomed signs of easing trade tensions following the 90-day truce between the U.S. and China. Investor sentiment was further supported by a return of inflows into U.S. government bonds, particularly in the intermediate segment. The strong demand helped cushion the impact of domestic selling pressure and contributed to a more balanced rate environment overall. In Europe, however, the picture was different. German Bund yields moved higher as investors recalibrated their expectations for future European Central Bank rate cuts. Recent comments from policymakers, coupled with a more stable global backdrop, reduced the urgency for aggressive easing. Yield curves steepened across the euro area, and the spread between sovereign bonds and corporate credit widened to multi-year highs—creating more incentive for investors to rotate into risk assets. Eurozone government bond ETFs delivered positive returns for the month, particularly in the longer-dated segment. In Switzerland, the bond market remained resilient, supported by expectations of additional monetary easing from the SNB and continued strength in the Swiss franc. Local bonds gained modestly in April and continue to benefit from a favorable macro environment. Meanwhile, the transatlantic yield spread between 10-year U.S. Treasuries and German Bunds narrowed to around 171 basis points, down from April’s recent highs. This reflects a mild convergence in monetary policy expectations between the two regions as markets digest a shifting global outlook. Looking ahead, the U.S. rate outlook appears more stable in the near term, while Europe may see further repricing depending on the evolution of ECB policy and inflation data. Diverging macro dynamics, FX moves, and central bank strategies are likely to keep cross-market rate differentials in focus.
Emerging market
Emerging market (EM) debt rebounded last week, buoyed by the U.S.–China tariff truce and renewed investor optimism. The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) advanced +1.8%, trimming its month-to-date loss to -0.1% and lifting its year-to-date return to +2.4%. Hard currency sovereign spreads narrowed modestly but remain elevated, reflecting ongoing caution amid global uncertainties. Local currency EM bonds also performed well, supported by a softer U.S. dollar and stable rate expectations. The VanEck JP Morgan EM Local Currency Bond ETF (EMLC) rose +1.0% on the week, extending its robust year-to-date performance to +7.2%. Countries like Indonesia, Hungary, Peru, and Uruguay led the gains among investment-grade EMs, while China and Panama lagged due to idiosyncratic challenges. In the corporate space, EM credit continued to show resilience. The iShares Emerging Market Corporate Bond ETF added +0.9% on the week, bringing its year-to-date return to +2.1%. Despite the positive momentum, issuance volumes remained subdued, indicating that investors are still selective amid the complex global backdrop. Regionally, Turkey stood out with a significant rally following the announcement of the Kurdistan Workers Party (PKK) disbandment, which ended a four-decade insurgency. This development, coupled with the global market rally post the U.S.–China tariff deal, led to a 3% surge in Turkish stocks and gains in international bonds. However, structural risks persist. Angola faced a $200 million margin call from JPMorgan, highlighting the financial strain on heavily indebted African nations and the vulnerabilities associated with non-traditional financing strategies. Such events underscore the importance of prudent risk assessment in EM investments. Looking ahead, while the recent relief rally offers a positive signal, EM investors should remain cautious. The interplay of global trade dynamics, domestic fiscal policies, and geopolitical developments will continue to shape the EM debt landscape.
