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What happened last week?
ECB Cuts Rates Again but Signals Caution as Policy Nears Neutral!
The European Central Bank (ECB) kicked off the March monetary policy meetings with a widely expected 25bp rate cut, bringing the Deposit Rate down to 2.50%. This marks a cumulative 150bps of easing since last June, progressively moving monetary policy toward a less restrictive stance. ECB President Christine Lagarde confirmed that policy normalization is nearing its final stages, stating, “Monetary policy is becoming meaningfully less restrictive.” However, the outlook remains clouded by uncertainty, with fiscal policy developments in Germany and across the EU still unfolding. While these initiatives are expected to boost growth and inflation in the medium term, they have yet to be factored into the ECB’s forecasts. Lagarde acknowledged the complexity of the situation, stating that risks and uncertainty are “all over.” The market took note—rate cut expectations for 2025 have been revised lower. Investors now price in just two additional 25bp cuts by year-end, projecting an ECB Deposit Rate of 2.00%. A month ago, markets had expected three cuts, with rates falling to 1.75%. Across the Atlantic, softer U.S. economic data is driving a shift in Fed expectations. A month ago, markets were pricing just one 25bp cut for 2025—now, they fully price in three cuts (June, September, and December). The upcoming March 19 FOMC meeting will be critical, as markets will closely analyze the Fed’s economic projections and Dot Plot to gauge how policymakers are factoring in slower U.S. growth and the potential impact of Trump’s fiscal policies. In Switzerland, slightly firmer-than-expected inflation data in February, combined with the spillover effects of Eurozone fiscal stimulus, have reduced expectations for additional SNB cuts. The Swiss National Bank (SNB) is still expected to deliver a 25bp cut on March 20, but futures now suggest this could be the final move in the easing cycle, keeping rates on hold for the remainder of the year. In the UK, monetary policy expectations remain largely unchanged, as weak economic growth continues to battle persistent inflationary pressures. Markets still price in two BoE rate cuts by December, with the first expected by mid-year. In Japan, markets increased their expectations for monetary tightening, with the BoJ target rate now expected to rise by 39bps in 2025, up from 30bps last week. The likelihood of a BoJ rate hike in April is growing, reflecting the country’s rising inflation pressures and a stronger economic backdrop. Looking ahead, the Bank of Canada (BoC) is up next, with a March 12 meeting expected to bring another 25bp rate cut. If confirmed, this would lower the BoC overnight rate to 2.75%, a dramatic shift from 5% just nine months ago. However, uncertainties tied to U.S. tariffs remain a key risk factor for Canadian monetary policy in the months ahead.
German Stimulus Boosts European Credit, While U.S. Spreads Widen on Policy Uncertainty
Germany’s €500 billion infrastructure investment plan over the next decade has set an extremely supportive backdrop for European corporate bonds, reinforcing an already constructive environment for investment-grade (IG) credit. With the EUR yield curve steepening and long-end yields staying elevated, corporate bonds are poised to outperform cash, offering higher yields with lower volatility compared to EUR government bonds. Many IG corporate bonds in telecom, utilities, energy, real estate, and insurance still yield above 3.5%, making them an attractive option for investors looking for stability in a volatile rate environment. Technicals remain strong, as EUR government debt has surged +15% over the past three years, while EUR IG real estate bonds have contracted -9%, supporting tighter spreads in credit markets. As a result, EUR IG spreads hit a new cycle low at 83bps, tightening 7bps last week, now 6bps tighter than U.S. IG spreads. Despite this strong technical backdrop, rate movements led to losses, with the iShares Core Euro IG Corporate Bond ETF down -1.3% (-0.5% YTD). However, recent rate volatility has created attractive entry points for EUR credit, supported by German fiscal stimulus and an improving economic outlook. In high yield (HY), spreads held steady at 289bps, with the iShares Euro HY Corporate Bond ETF falling -0.8% last week (+0.9% YTD). High-beta segments, such as AT1 CoCo bonds and corporate hybrids, saw declines, with the WisdomTree AT1 CoCo ETF slipping -0.5% for the week (+1.6% YTD) and European corporate hybrids down -0.7% (+0.6% YTD). Meanwhile, the U.S. credit market is navigating heightened policy uncertainty and weaker growth prospects, making a shift toward quality a more prudent trade. The demand for high-quality issuers remains strong, as evidenced by Mars Inc’s $26 billion bond issuance, where its 40-year tranche (rated A) was 13 times oversubscribed—highlighting investor preference for long-duration, high-quality credit. Despite this, U.S. IG spreads widened slightly to 89bps, leading to a -0.1% decline in the Vanguard USD Corporate Bond ETF (+2.1% YTD). U.S. HY spreads widened another 10bps to 297bps, reflecting growing credit risk divergence amid political uncertainty. The iShares Broad USD High Yield Corporate Bond ETF lost -0.4% last week, trimming its YTD gain to +1.8%.
Treasury Yields Climb as Markets Reprice Fed Cuts, European Bonds Under Pressure !
U.S. Treasuries sold off last week, with the 10-year yield surging 18bps to 4.30%, trimming its year-to-date gain to +2.8%. February’s nonfarm payrolls report showed 151k jobs added—slightly below consensus (160k)—but markets focused on sticky wage growth (+0.4% m/m) and Fed Chair Jerome Powell’s warning that the “last mile of disinflation will be bumpy.” With unemployment steady at 4.0%, investors pushed back expectations for Fed rate cuts, leading to a broad-based rise in yields. Despite the sell-off, optimism around Treasury Secretary Bessent’s deficit-reduction plan helped limit losses, keeping long-duration bonds in the lead (iShares 10-20 Year Treasury Bond ETF: +4.5% YTD). The yield curve steepened, with the 2s10s spread widening to 40bps as the 2-year yield climbed 8bps to 3.90%. In Europe, German Bunds underperformed, with the 10-year yield up 12bps to 2.50%, as investors questioned Chancellor Scholz’s proposed debt brake suspension and ECB President Christine Lagarde’s insistence that “rate cuts require clearer inflation progress.” The iShares Core EUR Govt Bond ETF slipped -0.3% this week but remains +0.6% YTD. Peripheral spreads narrowed slightly, with Italian BTPs gaining +0.2%, as political risks eased following signs of policy continuity in Italy. UK Gilts struggled, as hotter-than-expected services inflation (5.1% y/y) sent the 10-year yield surging 16bps to 3.95%, dashing hopes of a BoE pivot in the near term. The Vanguard U.K. Gilt ETF sits at +1.2% YTD, supported by softer growth signals but weighed down by sticky price pressures that complicate the BoE’s rate-cut path. In Japan, the bond market sell-off deepened, with the 10-year JGB yield rising 10bps to 1.55%—a decade high—on speculation that the Bank of Japan (BoJ) will accelerate tapering of its bond-buying program. Long-end JGB yields breached 2.10%, dragging the iShares Core JP Government Bond ETF down -2.6% YTD, as Japan’s yield curve continued to adjust to a more hawkish policy outlook. In Switzerland, the SNB kept rates on hold at 0.25%, but this failed to stem losses in the bond market. The 10-year Swiss yield rose 6bps to 0.85%, as high hedging costs and weak demand for low-yielding safe-haven assets weighed on Swiss bonds. The iShares Swiss Domestic Govt Bond ETF has now fallen -1.3% YTD, highlighting the continued underperformance of Swiss fixed income compared to global peers.
Emerging market
Trade War Fears Weigh on EM Bonds, While Select Markets Outperform.
Emerging market (EM) USD bonds remained surprisingly resilient, despite escalating global trade tensions and an increasingly unpredictable U.S. trade policy. It was a turbulent week for EM credit markets, with threatened tariffs on Mexico and Canada, China’s retaliation targeting U.S. agricultural exports, and reciprocal tariff measures, keeping investors on edge. Given the fluid trade environment, favoring markets that are less exposed to U.S. trade risks remains a prudent strategy. If U.S. growth slows but avoids a recession, EM economies may still suffer indirect effects through weaker global sentiment, reduced investor risk appetite, and capital outflows. However, a more constructive European outlook is emerging as a key support for Central and Eastern European (CEE) credit markets, benefiting sovereigns with close trade ties to the Eurozone. China’s National People’s Congress (NPC) sent mixed signals to the market. Authorities maintained a GDP growth target of “around 5%”, reinforcing the government's commitment to economic stability. However, the NPC also raised the fiscal deficit target to 4% of GDP, surpassing the traditional 3% limit, a move that underscores China’s willingness to use fiscal policy as a growth lever. That said, fiscal support for consumption remains modest (just 0.5% of GDP), leaving the door open for additional policy easing later in the year. On a country level, Argentina, Morocco, Oman, and Kazakhstan were standout performers last week. Morocco and Oman, in particular, have been gaining attention as rising stars in EM credit markets. Morocco, rated BB+ with a Positive Outlook by S&P, and Oman, rated Ba1 with a Positive Outlook by Moody’s, are attracting investors looking for improving credit fundamentals in high-yield EM names. Meanwhile, Ukraine’s sovereign bonds saw heightened volatility, as the U.S. administration ramped up efforts to secure access to Ukrainian mineral resources, adding another layer of geopolitical uncertainty to the already fragile market. In terms of performance, EM bonds ended the week in negative territory: EM sovereign hard-currency debt declined -0.3% (+2.4% YTD) while EM corporate bonds slipped -0.3% (+2.5% YTD). Overall, EM bonds posted a -0.7% loss on the week, though remain up +3.1% YTD.
