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What happened last week?
Markets Brace for a Wave of Rate Decisions Amid Growing Uncertainty!
With no major central bank decisions last week, investors are gearing up for a crucial March policy season, when all major central banks will define the next phase of their rate cycles. The ECB kicks off the action this week (March 6th), widely expected to cut rates by another 25bps, continuing its easing cycle. Economic data still paint a subdued growth picture in the Eurozone, justifying further rate cuts. Inflation uncertainty persists, but recent developments have been reassuring. Inflation expectations have eased, and the latest ECB wage data showed a significant slowdown in negotiated wage growth, falling from +5.4% YoY to +4.1% in Q4 2024. This cooling wage growth supports the case for easing but remains above levels consistent with the ECB’s 2% inflation target, prompting policymakers to remain cautious about the pace of future rate cuts. ECB officials continue to emphasize that, as rates approach the neutral level, the bar for additional easing is getting higher. Nevertheless, with inflationary risks subsiding and expectations of a German fiscal stimulus fading, markets have priced in slightly more ECB rate cuts for 2025 (-86bps vs. -78bps last week). In the United States, growth concerns are beginning to take center stage, pushing up expectations for Fed rate cuts. Consumer spending is slowing, and sentiment indicators suggest domestic demand—the backbone of U.S. economic growth—is losing steam. As a result, while the Fed is expected to hold rates steady at its March 19th meeting, futures markets now price in more than two 25bps cuts (-61bps) by December 2025, with the first cut likely in June. This is a notable shift from last week when only -46bps were priced in. However, the U.S. outlook remains highly uncertain, with trade tariffs, upcoming tax cuts, and fiscal policy shifts all creating potential upside risks for inflation. Elsewhere, rising risk aversion in financial markets led to an increase in rate cut expectations for both the Swiss National Bank (SNB) and the Bank of England (BoE). Futures now price in -40bps of SNB cuts this year (vs. -30bps last week), with the first 25bps cut expected in March, while BoE rate cut expectations have risen to -59bps (vs. -53bps prior). The BoE is likely to pause in March but continue its gradual quarterly easing cycle in May. With central banks navigating diverging economic trends, geopolitical risks, and inflation uncertainties, March could set the tone for the rest of the year. The ECB, Fed, SNB, and BoE meetings in the coming weeks will be crucial in shaping market expectations and defining the next steps in the global monetary policy cycle.
Spreads Widen as Policy Uncertainty Weighs, But Lower Yields Provide Support.
Growing unease around policy uncertainty, tariffs, and weakening consumer confidence has dampened investment sentiment, leading to a widening in U.S. credit spreads. Spreads have now widened for eight consecutive trading sessions, the longest stretch since October 2023, signaling a shift in market sentiment. Investment-grade (IG) spreads hit 90bps, erasing this year’s earlier tightening. However, a declining 10-year Treasury yield last week offered a much-needed boost to corporate bonds, particularly in the IG space, helping them post solid gains despite spread widening. The risk of fallen angels (bonds downgraded from IG to high yield) is climbing but remains highly idiosyncratic rather than a systemic concern. The total volume of credit downgrades from IG to HY is the highest since Q4 2020, but market reactions have been muted. Fitch’s negative outlook on Nissan (BBB-) had little impact, and Nissan bonds actually rallied after the company announced its CFO as acting CEO. With Honda previously signaling openness to renewed talks if Nissan’s CEO stepped down, speculation is rising over a potential Honda takeover, rather than a merger of equals. Despite widening spreads, U.S. corporate bond performance was strong, entirely driven by lower Treasury yields. The Vanguard USD Corporate Bond ETF rose +0.7% last week, bringing its YTD return to +2.1%, while U.S. HY spreads widened by 9bps to 281bps, yet the iShares Broad USD High Yield Corporate Bond ETF still gained +0.6% for the week (+2.4% YTD). March is shaping up to be a high-volume issuance month for U.S. IG bonds, with expected supply between $175B-$200B—well above last year’s $142B, adding potential technical pressure. In Europe, credit markets followed a similar pattern, with EUR IG spreads widening by 2bps to 88bps, giving up some of the prior tightening. The iShares Core Euro IG Corporate Bond ETF remained flat last week (+0.9% YTD), while Euro HY spreads held steady at 297bps, reflecting resilient demand. The iShares Euro HY Corporate Bond ETF climbed +0.3% (+1.7% YTD), benefiting from strong carry. High-beta credit segments were stable, with AT1 CoCo bonds holding firm. The WisdomTree AT1 CoCo ETF remained flat for the week (+2.0% YTD), supported by the outperformance of European bank stocks. The gap between subordinated debt and CoCo bond yields is now historically narrow, reflecting strong market demand. Meanwhile, European corporate hybrids were unchanged for the week, maintaining a solid +1.2% YTD return. As markets navigate policy risks, widening spreads, and upcoming issuance, technicals and Treasury yield movements will likely dictate the next move in credit markets.
Treasuries Rally as Growth Concerns Mount, While European Yields Steepen!
February was a strong month for U.S. Treasuries, with bonds posting a +1.3% gain and extending their year-to-date performance to +2.5%. The rally was fueled by disappointing economic data and renewed market confidence in Treasury Secretary Scott Bessent’s plan to cut the U.S. deficit-to-GDP ratio to 3%. While skepticism initially surrounded this goal, sentiment is shifting, with investors starting to price in its potential impact on growth. If achieved, this fiscal tightening could drag long-term rates lower, unless the administration secures new revenue sources from tariffs or private-sector investment commitments from global giants like TSMC. The 10-year U.S. Treasury yield dropped 33bps in February, ending at 4.2%—its lowest level of 2025. The yield curve flattened by 12bps to 21bps, as growth fears pushed long-term rates lower, while persistent inflation concerns kept front-end rates elevated. The 2-year yield fell below 4% for the first time since October, reflecting shifting rate-cut expectations. Long-duration bonds were clear winners, with the iShares 10-20 Year Treasury Bond ETF now up over 5% year-to-date. In contrast, European government bonds saw more muted gains, with the 10-year German Bund yield dipping just 5bps to 2.4% in February. Year-to-date, however, German yields remain slightly higher, up 4bps. A steepening German yield curve (from 29bps to 40bps) reflects expectations that Germany could relax its debt brake or create a special fund for additional fiscal spending. Additionally, the potential resolution of the Ukraine war has led to an upward shift in long-end yields. Notably, the German yield curve is now steeper than the U.S. yield curve again. Despite this backdrop, European bonds performed positively, with the iShares Core EUR Govt Bond ETF up +0.6% year-to-date. Inflation-linked bonds outperformed expectations, with the iShares EUR Inflation Linked Govt Bond ETF gaining +0.7% in 2025. UK gilts, which historically move more in sync with U.S. Treasuries than European bonds, also benefited. The Vanguard U.K. Gilt ETF climbed +0.8% in February and is now up +1.5% in 2025, supported by lower global growth expectations and softer U.K. inflation prints. On the other hand, Japanese and Swiss bonds have struggled. In Japan, the Bank of Japan’s shift toward tighter policy has pushed yields higher, with the 10-year JGB rising from 1.1% to 1.4% this year and long-end yields surpassing 2%. As a result, the iShares Core JP Government Bond ETF has fallen -1.9% year-to-date, making it one of the worst-performing government bond markets. In Switzerland, a combination of low yields, high hedging costs, and a Swiss National Bank (SNB) that appears reluctant to cut rates further has weighed on the market. After outperforming in 2024, Swiss government bonds have struggled, with the iShares Swiss Domestic Government Bond 7-15 ETF down -0.9% year-to-date.
Emerging market
Spreads Widen as Policy Uncertainty Weighs, But Lower Yields Provide Support.
Growing unease around policy uncertainty, tariffs, and weakening consumer confidence has dampened investment sentiment, leading to a widening in U.S. credit spreads. Spreads have now widened for eight consecutive trading sessions, the longest stretch since October 2023, signaling a shift in market sentiment. Investment-grade (IG) spreads hit 90bps, erasing this year’s earlier tightening. However, a declining 10-year Treasury yield last week offered a much-needed boost to corporate bonds, particularly in the IG space, helping them post solid gains despite spread widening. The risk of fallen angels (bonds downgraded from IG to high yield) is climbing but remains highly idiosyncratic rather than a systemic concern. The total volume of credit downgrades from IG to HY is the highest since Q4 2020, but market reactions have been muted. Fitch’s negative outlook on Nissan (BBB-) had little impact, and Nissan bonds actually rallied after the company announced its CFO as acting CEO. With Honda previously signaling openness to renewed talks if Nissan’s CEO stepped down, speculation is rising over a potential Honda takeover, rather than a merger of equals. Despite widening spreads, U.S. corporate bond performance was strong, entirely driven by lower Treasury yields. The Vanguard USD Corporate Bond ETF rose +0.7% last week, bringing its YTD return to +2.1%, while U.S. HY spreads widened by 9bps to 281bps, yet the iShares Broad USD High Yield Corporate Bond ETF still gained +0.6% for the week (+2.4% YTD). March is shaping up to be a high-volume issuance month for U.S. IG bonds, with expected supply between $175B-$200B—well above last year’s $142B, adding potential technical pressure. In Europe, credit markets followed a similar pattern, with EUR IG spreads widening by 2bps to 88bps, giving up some of the prior tightening. The iShares Core Euro IG Corporate Bond ETF remained flat last week (+0.9% YTD), while Euro HY spreads held steady at 297bps, reflecting resilient demand. The iShares Euro HY Corporate Bond ETF climbed +0.3% (+1.7% YTD), benefiting from strong carry. High-beta credit segments were stable, with AT1 CoCo bonds holding firm. The WisdomTree AT1 CoCo ETF remained flat for the week (+2.0% YTD), supported by the outperformance of European bank stocks. The gap between subordinated debt and CoCo bond yields is now historically narrow, reflecting strong market demand. Meanwhile, European corporate hybrids were unchanged for the week, maintaining a solid +1.2% YTD return. As markets navigate policy risks, widening spreads, and upcoming issuance, technicals and Treasury yield movements will likely dictate the next move in credit markets.
