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What happened last week?
Last week’s US economic data raised fresh concerns over inflation, particularly within the service sector. July’s Producer Price Index (PPI) came in well above expectations, marking the strongest service-sector price increase in three years. This follows a similarly troubling Consumer Price Index (CPI) service sector print earlier in the week.
This trend complicates the U.S. Federal Reserve’s path forward, as elevated service inflation—present on both producer and consumer sides—suggests more entrenched price pressures. As a result, market expectations for several imminent rate cuts are being reassessed, with investors now pricing in a slower and more cautious easing cycle. A 25bp rate cut in September is no longer taken for granted (83% probability) and the implied rate cuts by the end of the year have been revised lower to -53bp (vs -64bp prior to the PPI release). All eyes are now on the Jackson Hole symposium at the end of the week for hints on the rate outlook and potential adjustments to the Fed’s approach on inflation targeting.
Most ECB members were likely enjoying their summer break last week but Governing Council member Joachim Nagel reiterated his view that “key interest rates are currently at a very good level” and that the ECB can now “monitor how the economy develops” and “react flexibly if necessary”. This confirms that the ECB has now entered a “wait-and-see” stance after its rate cut in June, and that the ECB’s rate cut cycle might be finished unless unexpected developments happen in the coming months. Future markets now assign only a 45% chance of another 25bp rate cut before the end of the year.
Rate cut expectations have also continued to be revised lower for the Bank of England, extending the trend appeared after the “hawkish cut” of the previous week. Future markets now only assign a 50% probability of another 25bp cut by the end of the year (vs 100% probability before the August BoE meeting).
In Australia, the RBA cut its key rate by 25bp to 3.60% as expected last week. Future markets currently price in another 25bp rate cut during Q4 2025. In Norway, the Norges Bank kept its key rate unchanged at 4.25% as expected, and future markets continue to price in a 25bp cut before the end of the year.
Credit markets continued to attract interest last week as the “risk-on” tone prevailed on financial markets. The combination of a resilient economic growth outlook and of defiance regarding sovereign bonds in a context of massive fiscal stimulus likely support demand for corporate bonds and tighter credit spreads. However, the rise in rates somewhat balanced the impact of tighter spreads, resulting in marginally negative performance for higher quality credit.
US Investment Grade ETFs posted a small total return decline last week (Vanguard USD Corporate Bond ETF -0.1%). US High Yield ETFs were slightly up (+0.2% for the iShares Broad USD High Yield).
EUR credit spreads also experienced some tightening. The spread tightening was more than offset by the rise in yields for Investment Grade bonds, resulting in a slightly negative performance over the week for EUR IG ETFs (-0.1%). EUR High Yield ETFs experienced a positive performance (+0.2%) as the spread impact more than offset the rise in yields.
Credit spreads remain historically tight. Light summer issuance may keep them contained, but the September supply wave could test market resilience if rally fatigue sets in.
USD rates ended up the week mostly higher following the release of PPI inflation data, as investors are still torn between concerns of slowing economic growth and fears of inflation resilience (or even inflation resurgence). Uncertainties surrounding the Fed’s next Chair, divisions within the FOMC in the context of repeated and significant political pressures for lowering rates also contribute to oscillations in USD rates, without any clear direction for the time being. US treasury 10-year yields have evolved in a 4.2%/4.5% range for most of the past 6 months.
Last week saw a bear steepening of the USD yield curve. 2-year yields closed the week marginally lower (-1bp) from the previous Friday at 3.75% after having dropped as low as 3.66% by midweek. Long-term yields were up on the week (10y +3bp to 4.32%, 30y up +7bp to 4.92%), a steepening driven by higher real yields while inflation expectations edged lower (US inflation breakeven 10y down -2bp to 2.38%).
As a result, short-to-medium term US Treasury ETFs were basically flat last week while ETFs on longer maturities lost ground (iShares Treasury 7-10y -0.2%, Treasury 10-20y -0.7%, Treasury 20y+ -1.0%). The rise in real yields also weighed on TIPS, and the iShares TIPS Bond ETF was down -0.3% last week.
EUR rates were also on the rise last week and EUR sovereign yield curves also experienced a continuation of the trend at play since the beginning of the year. German 2-year yields were up +2bp to 1.97%, 5-year yields rose +6bp to 2.34% while Bund 10y reached their highest level since the end of March (+10bp to 2.79%) and 30y yields jumped to their highest level since 2011 (3.35%). Similar movements were witnessed for other European sovereign yield curves, along with a modest sovereign spread widening (+2bp for the Frenc/German 10y spread, +1bp for the Italian/German 10y spread).
As a result, performances were negative across the board for European sovereign bonds’ ETFs last week. The iShares EUR 3–7-year Government Bond ETF lost -0.2% and its 10-15y equivalent was down -0.8%.
Swiss and UK government bonds’ ETFs were also down last week as CHF and GBP yields also rose. The iShares Swiss Domestic Government Bond 3-7year ETF was down -0.4% (-.6% for the 7-15y) and the Vanguard UK Gilt ETF lost -0.7%.
Emerging market
EM sovereign USD bonds rallied further this week, supported by expectations of a Fed rate cut at the September meeting. Sovereign HY bonds outperformed, with spreads tightening further toward new lows: EM sovereign spreads indeed fell to their lowest level since 2007.
As a result, Emerging Market bonds experienced another week of positive performance fueled by spread compression and yield carry.
EM USD sovereign bond indices posted a solid performance of +0.5% while EM USD corporate bond indices were up +0.4%.
The VanEck J.P. Morgan EM Local Currency Bond ETF also rose +0.4% last week, while the iShares USD Asia High Yield Bond ETF bounced up +0.6%.
EM spreads have gotten to historically compressed levels. While fundamentals suggest no imminent trigger for a sudden and pronounced reversal, those expensive valuations warrant greater selectivity and a cautious approach.
