Last week opened the last round of central banks’ meetings for 2025. The Fed delivered a third consecutive 25bp rate cut, bringing the Fed Funds target range to 3.50/3.75%. Chair Powell struck a less hawkish tone than expected, emphasising labour market risks and noting recent inflation stabilization. Guidance points to a “wait-and-see” stance, with the median projection showing only one cut in 2026, while future markets currently price slightly more than two 25bp cuts for next year. On the same day, the BoC held its policy rate at 2.25%, judging rates to be “about the right level” if the economy evolves as projected. One day before, the RBA had kept the AUD cash rate at 3.60%, displaying a hawkish tone as policymakers consider a hike as early as February.

The SNB kept its key rate unchanged at 0.00% and clearly signaled that the bar for further easing is high. President Schlegel stressed that a move below zero remains unlikely, and the most likely policy path in 2026 is stable short-term rates at 0%. The Banco Central do Brasil kept its Selic rate unchanged at 15.0%. With inflation back into the target range, the BCB eased its previously hawkish tone and opened the door to potential rate cuts in 2026.

The ECB is expected to keep its key rate unchanged this week, but Isabel Schnabel struck a hawkish tone last week, expressing comfort with expectations of a future hike and warning that inflation risks remain skewed to the upside. Several other central bank meetings are also due this week: the Bank of England is expected to cut its base rate by 25bp to 3.75%, the Riksbank and Norgesbank should keep their rates unchanged while the Bank of Japan is set to deliver a second 25bp rate hike this year that would raise JPY short term rates to 0.75%.

Credit

Credit spreads widened modestly last week, following ECB comments highlighting the resilience of the European economy and renewed concerns over the future independence of the U.S. Federal Reserve. Rising U.S. Treasury yields, alongside higher German Bund yields ahead of the ECB meeting on 18 December, weighed on credit performance and resulted in negative total returns across most credit segments.

U.S. investment grade declined 0.4% for a second consecutive week, while U.S. high yield also fell by-0.3%. In Europe, investment grade slipped further by -0.3%, with high yield proving slightly more resilient, down 0.1%, supported by coupon carry.

The only outperformance came from AT1 (Additional Tier 1 capital of banks) segment amid the market attention on the ECB’s High-Level Task Force on Simplification. The regulator is exploring potential reforms to the AT1 framework, including a possible phase-out or increased loss-absorption features. Importantly, any reform will apply only to new AT1s and would not be retroactive to the existing AT1s. Markets expect a lengthy implementation timeline, and potential the phase-out could reduce the extension risk on existing AT1s, as banks may be incentivised to redeem these existing AT1s. That said, regulatory uncertainty remains.

Concerns around AI-related capex have, by contrast, positioned European investment grade relatively favourably. Technology accounts for roughly 8% of the U.S. investment-grade index, versus only 2% in EUR investment grade, leaving European credit less exposed to AI capex risks at this stage.

As the year draws to a close, market activity has softened, and flows have become more muted. The dominant theme of this year has been the persistent inflows into EUR investment grade, particularly at the front end of the curve, with short-dated investment-grade funds attracting significantly more inflows than longer maturities or government bond funds.

While credit demand should remain strong in 2026, as many investors continue to view coupon carry as king, inflows are likely to moderate. Credit spreads are at historical tight levels, and the ECB appears approaching the end of its easing cycle.