Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

Central banks

Central banks remained in focus last week as officials across the U.S., Europe, and the UK offered mixed but generally cautious signals on the outlook for policy easing. In the U.S., Fed Chair Jerome Powell confirmed the central bank is reviewing its 2020 policy framework, hinting that its current approach to average inflation targeting could be revised. Markets interpreted this shift in tone as moderately hawkish, especially given other Fed officials’ remarks. Raphael Bostic predicted just one rate cut this year, citing persistent uncertainty and warning that new tariffs may raise inflation and slow the path to easing. Michael Barr echoed these concerns, highlighting risks from tariff-driven supply shocks, especially for small businesses. Powell stressed that anchored inflation expectations remain central to the Fed’s credibility and that future frameworks must withstand more frequent supply disruptions. These comments, combined with recent data, led futures markets to revise down expected rate cuts in 2025, now pricing in only 50bps of easing by year-end—down from 66bps a week prior. A similar tone emerged in Europe, where ECB policymakers signaled that while some additional easing is likely, the cycle may be nearing its end. Martins Kazaks noted the ECB is “relatively close” to its terminal rate and expects only a few more cuts, warning against moving too quickly given “very high” global uncertainty. Philip Lane confirmed that June’s forecasts will incorporate alternative scenarios to reflect rising trade-related risks, while President Lagarde acknowledged the euro’s strength as a sign of lost confidence in U.S. policy, positioning Europe as a perceived haven of stability. Belgium’s central bank governor Pierre Wunsch suggested rates might need to fall below 2% if the euro continues to appreciate and inflation softens further. Markets now price in 50bps of ECB cuts by year-end, down from 60bps previously. In the UK, firmer-than-expected Q1 GDP prompted a similar adjustment in expectations. BoE rate cut pricing declined from 57bps to 45bps, as investors scaled back bets on near-term easing. Across the board, central banks appear committed to a cautious and data-driven path, with growing focus on inflation persistence, trade shocks, and geopolitical spillovers.

Credit

Credit markets extended their gains last week, supported by stronger risk appetite, resilient earnings, and constructive technicals. The growing belief in a “Trump Put”—that the administration would step in to stabilize markets if needed—combined with improved business confidence and lower recession fears, helped fuel a rally in high yield and high-beta segments. Positive trade developments, including progress on U.S.–UK and U.S.–China deals, triggered spread tightening on announcement days and opened the door for further compression. Fundamentals are holding up well: in Q1, 90% of European banks beat revenue expectations, with net interest income proving robust despite multiple ECB rate cuts. On the supply side, technicals remain favorable—U.S. IG supply was net negative in April, a rare occurrence, and coupon flows are set to absorb the bulk of 2024 net issuance (75%+ in U.S. IG and HY, 65% in EUR IG, and over 100% in EUR HY). Last week, U.S. IG spreads narrowed 9bps to 93bps, with the Vanguard USD Corporate Bond ETF up +0.1% (YTD +1.5%). European IG followed, tightening 6bps to 98bps, and the iShares Euro IG ETF also rose +0.1% (YTD +0.9%). High yield outperformed: U.S. HY tightened 37bps to 316bps—now 30bps tighter than before the April 2 volatility—with the iShares USD HY ETF gaining +1.2% (YTD +2.6%). European HY narrowed 19bps to 330bps, and the iShares Euro HY ETF climbed +0.4%, lifting its YTD return to +1.9%. High-beta assets continued to recover, with European corporate hybrids up +0.2% (YTD +1.3%) and AT1s, via the WisdomTree CoCo ETF, gaining +0.4% (YTD +2.4%). While credit spreads may compress further, risks remain—especially from U.S. fiscal strains, curve swings, and potentially weaker Q2 earnings. Against this backdrop, moving selectively up in quality continues to offer both carry and protection.

Rates

Rate markets faced renewed turbulence last week, with long-end yields rising sharply across major developed economies. The move was led by the United States, where 30-year Treasury yields briefly broke above 5%—a level last seen in 2023—following a sovereign credit downgrade that reignited concerns around U.S. fiscal sustainability. The 10-year Treasury yield also moved higher, reaching around 4.50%, reflecting heightened sensitivity to long-term supply risks and the re-pricing of term premium. Despite the pressure on long duration, short and intermediate U.S. bonds proved more resilient. The iShares 3–7 Year Treasury Bond ETF (IEI) ended the week broadly flat, while the iShares 10–20 Year Treasury Bond ETF (TLH) declined by approximately 1%, consistent with steepening pressure and investor demand for lower duration exposure. In Japan, the long end of the curve saw one of the most pronounced moves globally. The 30-year Japanese government bond yield reached 3.0%, the highest level in nearly 25 years. The adjustment appears driven by shifting inflation expectations and signs that the Bank of Japan is gradually stepping away from aggressive curve control policies. Rising domestic yields may also reduce Japanese investor appetite for foreign fixed income assets. In contrast, European bond markets remained comparatively stable. The iShares € Govt Bond 3–7yr ETF gained a modest +0.2%, while the 10–15yr segment (IEGZ) slipped -0.1%. Germany’s 10-year Bund yield hovered near recent highs but failed to break decisively higher. Swiss bonds followed a similar path, with the iShares Swiss Domestic Government Bond 7–15 ETF posting a mild gain of +0.3% over the week. Swap spreads remained unusually tight, and U.S. rate volatility, as measured by the MOVE index, rose slightly, underscoring nervousness around long-term debt issuance and political headwinds. While central banks maintain a cautious tone, bond markets are re-evaluating the safety of duration. The backdrop remains one of rising long-end pressure, modest curve steepening, and lingering uncertainty over the future path of rates.

Emerging market

Emerging market debt extended its rebound last week, supported by improving global sentiment, stable U.S. policy signals, and growing investor demand for carry. The Bloomberg EM Hard Currency Aggregate Index rose +0.52% over the week, with sovereign and corporate USD bonds delivering solid returns (EMB +0.86%, CEMB +0.40%) as spreads continued to tighten. High yield names outperformed, particularly in Asia, where the iShares USD Asia High Yield Bond ETF (AHYG) jumped +0.91%, benefiting from easing credit concerns and a calmer outlook on trade. In contrast, local currency bonds took a brief pause, with the VanEck EM Local Currency Bond ETF (EMLC) slipping -0.04%, as EMFX momentum softened slightly. Nevertheless, EMLC remains the top-performing segment year-to-date (+7.68%), reflecting the earlier strength in emerging currencies and still-attractive real yields. Flows into EM fixed income were strong last week, with renewed interest driven by global investors returning to higher-yielding assets in a context of moderating volatility and limited near-term Fed action. Technical factors remain supportive: new issues have been well absorbed, with limited net supply and high levels of oversubscription reflecting healthy demand. On the macro side, hopes of renewed policy support in China and de-escalation in global trade tensions have helped lift sentiment across the asset class. Regional dynamics also played a role—Latin America continued to show relative resilience, supported by falling inflation and scope for policy easing, while countries like Turkey rallied on signs of political continuity. That said, pockets of stress remain, particularly among lower-rated frontier credits, where investor caution is still warranted. Overall, strong demand, high carry, and a steadier macro backdrop helped EM debt outperform developed market peers again this week, even if local currency names took a breather after their strong start to the year.


Our view on fixed income 

Rates
NEUTRAL

We are neutral on government bonds with maturities of less than 10 years. This stance is supported by elevated real yields, an anticipated peak in central bank tightening, a shift toward disinflation, attractive relative value compared to equities, and improving correlations. Conversely, we hold a negative view on bonds with maturities exceeding 10 years. A flat yield curve and low term premiums reduce their attractiveness, particularly in the context of ongoing interest rate volatility and potential fiscal pressures.

 

Investment Grade
NEUTRAL
We are neutral on Investment Grade corporate bonds. The sharp tightening in credit spreads, reaching lowest level since 2021, has considerably reduced the margin for safety in credit. Corporate Spreads now represent less than 20% in the total yield of an investment grade bond. This “price to perfection” encourages us to be more vigilant in this segment while the credit market's overall health is supported by robust demand and strategic maturity management
High Yield
NEUTRAL

We are neutral on high-yield (HY) bonds, favoring short-dated HY while negative on intermediate and long maturities due to unattractive valuations. U.S. HY spreads have tightened, signaling low default expectations and economic stability. While short-term HY bonds offer selective opportunities, overall valuations appear stretched, particularly if volatility increases. We see more value in subordinated debt than HY bonds.

 
Emerging Markets
NEUTRAL
We have upgraded Emerging Market debt to neutral, driven by attractive absolute yields and solid fundamentals. The primary market remains healthy, and we favor short-dated EM bonds with yields above 6.5%. However, risks persist: valuations are stretched, Trump’s potential tariffs could pressure EM economies, and idiosyncratic risks remain, notably in Brazil and India. Given this backdrop, we stay selective, favoring short-duration opportunities while cautious on broader EM debt.

The Chart of the week

U.S. 30-Year Yield Breaks 5% After Credit Downgrade!

   

20250519_cow

Source: Bloomberg

The long end of the U.S. Treasury curve made headlines last week as the 30-year yield surged past the 5% mark—its highest level since 2007. The move followed a surprise downgrade of the U.S. sovereign credit rating, which reignited concerns about fiscal discipline, rising interest costs, and the long-term trajectory of public debt. The sharp repricing reflects a renewed demand for term premium, as investors now require greater compensation to hold long-dated government paper. This development has broad implications for global fixed income markets. With U.S. Treasuries serving as the benchmark for pricing across the credit spectrum, higher yields at the long end can lead to tightening financial conditions globally. It also pressures other sovereign markets to adjust accordingly and may complicate monetary policy for central banks trying to manage inflation without destabilizing growth. From a portfolio perspective, the move highlights the re-emergence of duration risk and shifts the focus back onto structural imbalances in the U.S. fiscal position. Foreign demand for Treasuries appears to be softening just as supply is rising—amplifying volatility and steepening the curve. For fixed income investors, the 30-year breakout is not just a technical milestone—it’s a signal that markets are no longer willing to overlook long-term risks, even in the world’s most liquid bond market.

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