Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

Central banks

Federal Reserve officials remain in a self-imposed blackout ahead of Wednesday’s FOMC, which is expected to result in a hold. May’s CPI and PPI data arrived below forecasts, with inflation expectations softening—signaling that tariff effects have not yet permeated prices. However, the 13% weekly jump in Brent oil prices, triggered by renewed conflict between Israel and Iran, threatens to generate upward pressure on headline inflation and wage expectations. The Fed now faces twin supply-side shocks—tariffs and oil—that it cannot directly control. These complicate its disinflation path and highlight upside risks stemming from longer-lasting inflation expectations or second-round effects. The key questions this week: will policymakers adjust their dot plots to reflect remaining inflation risks? Or will they hold steady, confident that the core outlook remains stable? Over in Europe, the ECB finds itself similarly constrained. After eight rate cuts this cycle, only one more 25bp cut is priced in. But with oil moving sharply higher and the euro fluctuating, the central bank’s decision-making has grown more perilous. The upcoming policy meetings from the SNB, BoE, Norges Bank, Riksbank, and BoJ are unlikely to depart materially from their current cautious stance. Globally, central bankers are navigating an environment of significant uncertainty—where neither trade nor energy developments can be reliably forecasted.

Credit

Credit markets initially tightened as disinflation hopes lifted sentiment. But once oil prices surged, spreads widened across the board. Still, ongoing inflows strengthened the underbelly of the credit cycle: U.S. high-yield, euro investment grade and high-yield all continued to attract capital. Section 899 U.S. tax changes had little impact, thanks to portfolio interest exemptions. Despite rate pressures, U.S. BB-rated senior debt continued to outperform, defending against volatile idiosyncratic risk. For the week, U.S. IG spreads widened by just 1bp, U.S. HY by 9bp, euro IG by 1bp, and euro HY by 6bp. Nonetheless, strong demand kept returns positive: the U.S. IG ETF rose 0.4% (2.6% YTD), U.S. HY gained 0.1% (3.1% YTD), euro IG edged up 0.1% (1.5% YTD), though euro HY fell 0.2% (2.4% YTD). Hybrid and AT1 bonds held steady. The return to risk-off dynamics reminds investors that while spreads are contained, macro pressures can test even steady credit flows.

Rates

Global interest rates generally rose again last week as the surge in energy prices fueled by escalating tensions in the Middle East added an additional layer of uncertainties on medium-term inflation prospects. Interestingly, US long term rates that had initially declined after the release of soft inflation data bounced up on Friday along with the spike in oil prices. Unlike in some previous episodes of geopolitical tensions, US Treasury bonds didn’t benefit from risk aversion to attract “safe haven flows” but were rather sensitive to the deterioration in inflation prospects, especially on the front-end of the curve as the probability of Fed’s rate cuts was revised lower. The iShares Treasury 3-7 years was down -0.36% over the week, the 7-10y lost -0.30% while longer maturities were roughly flat. The backdrop of high and rising public debt in the US may be one explanation for this reaction. EUR rates also were on the rise last week (iShares EUR 3-7 years -0.26%), as well as CHF yields. GBP yields were an exception as they were dragged lower by weaker than expected GDP data for the month of April. 

Emerging market

Emerging market sovereign bonds delivered solid gains last week, with global demand offsetting external jitters. Mexico and Romania led performance, while Argentina's May CPI fell to just 2%—a five-year low—offering a glimmer of stability. In contrast, political risk in Colombia spooked investors after a candidate was injured. Indian corporates notably favored local INR issuance over USD, reacting to a pronounced cost advantage. EM corporate credit outperformed with a 0.5% gain, while Asia high-yield edged down 0.2%, weighed down by China-related worries. VanEck’s EM Local Currency Bond ETF rose 0.4%, while USD sovereign bonds gained 0.5%. With U.S. rates elevated and the dollar steady, emerging markets offer competitive returns, yet remain vulnerable to structural risks—especially geopolitics and fiscal fragility.


Our view on fixed income 

Rates
NEUTRAL

We are neutral on government bonds with maturities of less than 10 years. This stance is supported by elevated real yields, an anticipated peak in central bank tightening, a shift toward disinflation, attractive relative value compared to equities, and improving correlations. Conversely, we hold a negative view on bonds with maturities exceeding 10 years. A flat yield curve and low term premiums reduce their attractiveness, particularly in the context of ongoing interest rate volatility and potential fiscal pressures.

 

Investment Grade
NEUTRAL
We are neutral on Investment Grade corporate bonds. The sharp tightening in credit spreads, reaching lowest level since 2021, has considerably reduced the margin for safety in credit. Corporate Spreads now represent less than 20% in the total yield of an investment grade bond. This “price to perfection” encourages us to be more vigilant in this segment while the credit market's overall health is supported by robust demand and strategic maturity management
High Yield
NEUTRAL

We are neutral on high-yield (HY) bonds, favoring short-dated HY while negative on intermediate and long maturities due to unattractive valuations. U.S. HY spreads have tightened, signaling low default expectations and economic stability. While short-term HY bonds offer selective opportunities, overall valuations appear stretched, particularly if volatility increases. We see more value in subordinated debt than HY bonds.

 
Emerging Markets
NEUTRAL
We have upgraded Emerging Market debt to neutral, driven by attractive absolute yields and solid fundamentals. The primary market remains healthy, and we favor short-dated EM bonds with yields above 6.5%. However, risks persist: valuations are stretched, Trump’s potential tariffs could pressure EM economies, and idiosyncratic risks remain, notably in Brazil and India. Given this backdrop, we stay selective, favoring short-duration opportunities while cautious on broader EM debt.

The Chart of the week

10-Year Breakeven vs. Brent: No Reaction Yet!

20250616_cowSource: Bloomberg

This week's chart plots the 10-year U.S. breakeven inflation rate, which has remained anchored around 2.28%, against the Brent crude price, which spiked over 13% to about $78 mid-week. Despite the sharp rise in oil, breakevens remain largely unchanged, underscoring that markets are seeing the oil move as a temporary premium, not a structural inflation shift.

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