Federal Reserve officials adopted a more hawkish tone after April’s stronger-than-expected inflation data. Chicago Fed President Austan Goolsbee warned persistent services inflation may reflect an overheating economy, while Boston Fed President Susan Collins argued rates should remain restrictive for “some time.” Kansas City Fed President Jeff Schmid also described inflation as the economy’s key risk. Meanwhile, attention also focused on leadership transition dynamics as the nomination of Kevin Warsh as the next Fed Chair was confirmed by the Senate but outgoing Chair Jerome Powell was temporarily reappointed pending the swearing-in of his successor. In this context, future markets began pricing in the possibility of a Fed rate hike by the end of the year (60% probability), a stark reversal from the rate cuts priced only since the beginning of the year.

ECB officials signaled rising concern that the Iran conflict could require further monetary tightening. Bundesbank President Joachim Nagel said rate hikes are becoming more likely as energy-driven inflation pressures intensify, warning second-round effects could spread beyond fuel prices. Finnish central bank governor Olli Rehn cautioned that euro-area data increasingly point toward stagflation, with weak growth alongside accelerating inflation. Policymakers nevertheless stressed that June’s decision will remain data dependent, even if future rate markets see a June rate hike as highly likely (87% probability) and still expect three 25bp hikes by the end of 2026.

At the Bank of England, hawkish policymakers strengthened calls for tighter policy amid concerns over second-round inflation effects from the Middle East energy shock. Chief Economist Huw Pill advocated a “modest but prompt” rate increase, arguing inflation expectations have become more sensitive after repeated supply shocks. MPC member Megan Greene similarly warned central banks must respond proactively to changing wage- and price-setting behaviour. Future rate markets mostly expect the BoE to remain on hold in June (32% probability of a 25bp rate hike) to announce a 25bp rate hike at the July 30^th meeting.

Credit

Corporate credit spreads were remarkably resilient last week despite the broad sell-off across GBP, USD, EUR rate markets. Total returns were negative across all credit segments purely driven by higher U.S. Treasury yield and German Bund yields. Credit spreads were supported by corporate fundamentals, with no clear signs of underlying business weakness.

Sovereign bond yields now reached new cycle highs across Europe and the UK amid rising Brent oil prices (+8% week-over-week). Between investment grade (IG) and high yield (HY), the HY saw less severe losses, as its shorter duration and callable feature make it less sensitive to rising interest rate than IG.

In EUR IG, credit spreads tightened across the board. The cost structural of many European corporates have become more resilient to energy price volatility than during the 2022 episode of energy shock.

EUR IG and EUR HY continued to attract inflows last week, while EUR government bond also recorded strong inflows. In contrast, money market funds indeed struggled as steep yield curves incentivised investors to reach to medium-term yield.

First quarter earnings across EUR HY have been steady, with Italian and French HY corporates showed further improvement in leverage metrics.

While corporate credit spreads are at multi-year tights, all-in yields continue to screen attractively relative to historical average. In addition, significant spread dispersion across sectors and issuers create opportunities for active investors. Higher policy rates have effectively become the market’s primary driver for carry.