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What happened last week?
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 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.
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.
