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What happened last week?
Last week was marked by diverging views from Fed members on the outlook for monetary policy, in the highly uncertain context of intense political pressures on Chair Jerome Powell and ahead of the pre-FOMC blackout period.
New York Fed President John Williams warned that Trump’s proposed tariffs are already driving inflation higher and emphasized that the current 4.25–4.5% rate range remains appropriate. In contrast, Governor Christopher Waller called for a rate cut, titling his speech “The case for cutting now,” and advocating a 25 basis point reduction.
Meanwhile, political drama escalated as reports surfaced—then were denied—that President Trump planned to fire Fed Chair Jerome Powell. Though legally questionable, the threat adds pressure. The drama caused September rate cut odds to spike from 57% to 80%, before settling back to 64% by Friday following Waller’s dovish comments. Market-based probabilities of Fed’s rate cut by the end of the year oscillated too in this context and ended up the week slightly lower (-45bp expected vs -50bp the prior week).
Ahead of this week’s ECB meeting, when a status quo on rates is expected for the first time in a year, there wasn’t much in terms of data or ECB members’ speeches last week. However, market-based expectations for an additional 25bp rate cut by the end of the year edged up, in the context of renewed concerns about US tariffs for European exports and a potential negative impact on European economies.
Odds of a 25bp rate cut by the Bank of England at its next meeting on August 7th also slightly rose despite stronger-than-expected inflation data, as concerns around the economic growth dynamic are mounting.
U.S. Banks, including JPMorgan, Bank of America and Goldman Sachs, delivered stronger-than-expected Q2 earnings, with robust trading revenue offsetting softer loan income.
President Trump signed the GENIUS act, establishing a framework for stablecoin issuance. Major U.S. banks signaled readiness to provide stablecoin solutions, though questions remain over the scalability of alternative use cases in the longer term.
U.S. issuers now account for 20% of EUR-denominated non-financial corporate bonds. H1 2025 marked the strongest first half ever for Reverse Yankee issuance, driven by favorable funding costs in Europe.
Dollar weakness also plays a part. U.S. companies with European revenues are increasingly seeking natural hedges.
Investors are keen on credit as corporates are deleveraging at a faster pace than governments. EUR government bonds and money market funds saw outflows. Inflows to EUR credits are uninterrupted amid strong credit technical in summer. Too many assets chase fewer new bond issuance. The €500 million 5-year bond from El Corte Inglés attracted 8 times oversubscription.
U.S. credit spreads tightened last week, while EUR credit spreads widened a touch.
U.S. investment grade (IG) spreads narrowed by 3 bps to 80 bps, and high yield (HY) by 4 bps to 293 bps. Correspondingly, U.S. IG bond ETFs rose 0.2% (+3.4% YTD), and HY ETFs gained 0.3% (+4.8% YTD).
In Europe, IG spreads widened by 1 bp to 83 bps, while HY spreads widened by 6 bps to 295 bps—both nearing U.S. levels. Euro IG ETFs advanced 0.2% (+2.0% YTD), while Euro HY ETFs slipped 0.1% (+3.1% YTD).
Riskier segments underperformed: euro hybrid corporate bonds fell 0.1% (+3.3% YTD), and Additional Tier-1 bank capital (AT1s) also declined 0.1% (+4.5% YTD).
In the coming days, the EU will discuss retaliation against 30% U.S. tariffs set for August 1. Although tight credit spreads may be vulnerable to shocks, low summer new issuance will support current spread levels. Elevated spread dispersion in sectors such as retail, technology, auto, and healthcare could present alpha opportunities for skilled bond pickers.
Interest rates generally declined last week, reversing part of the increase witnessed in the earlier part of the month. Renewed concerns and uncertainties around US tariffs appear to dampen growth expectations for the second half of the year and to balance inflation fears, as tensions remain between the US and major trade partners such as the EU or Japan ahead of the August 1st deadline.
The USD and EUR yield curves shifted downward, with medium and long-term rates experiencing a pullback. The US Treasury 5y yield was down -8bp to 3.91% while the 10y declined -6bp to 4.37%. The German 5y and 10y yields fell respectively -10bp and -11bp to 2.18% and 2.62%, with similar movements witnessed across other European sovereign curves. GBP yields bucked the trend, with the 5y yield up +5 bp to 4.09% and the Gilt 10y up +2bp to 4.62%.
Worth mentioning, the decline in USD and EUR yields was driven by real rates (a sign of lower growth expectations) while inflation breakevens continued to edge up. The US-year inflation breakeven rate rose +3bp to a new high since February, at 2.42%, and USD 2-year inflation swaps crossed 3% for the first time in more than two years.
In this context, the performance of US Treasury ETFs was positive for short-to-medium term maturities (up to 10y): the iShares Treasury 3-7y was up +0.2% and the 7-10y rose +0.1%. Long-duration ETFs posted negative performance last week (10-20y -0.2%, 20y+ down -0.4%). Inflation-protected securities benefited from the decline in real yields, with the iShares USD TIPS ETF up +0.3%.
EUR sovereign ETFs had a positive week across all maturities. The iShares EUR 3-7y government bond ETF was up +0.3% and the 10-15y rose +0.2%, as the EUR Inflation-linked Government Bond ETF.
GBP sovereign bond ETFs had a negative week, with the iShares UK Domestic Government Bond 3-7y down -0.4%.
Emerging market
Emerging market (EM) sovereign dollar bonds were flat to modestly higher last week, with Latin America underperforming, while Oman outperformed following its upgrade to investment grade by Moody’s.
Argentina was also in focus, as Moody’s raised its rating by two notches to Caa1, aligning it with Fitch. The upgrade reflects the liberalization of exchange and capital controls, along with a new $20 billion IMF Extended Fund Facility, which has boosted hard currency liquidity and lowered the risk of a credit event.
In Asia, China’s Q2 GDP grew 5.2%, beating expectations. Exports remained resilient due to trade rerouting, though volumes are expected to decline in H2 as tariff impacts take full effect.
Indonesia secured a deal with the U.S. to reduce tariffs to 19%, down from a threatened 32%, just ahead of the August 1 deadline. In exchange, Indonesia will apply zero tariffs on key U.S. imports, including energy, agricultural goods, and 50 Boeing aircraft.
Romania’s fiscal consolidation plan moved forward. The centrist government survived a no-confidence vote. The victory paves the way for a sweeping austerity package focused on cutting costs across state-owned enterprises.
EM debt funds continued to attract steady inflows.
The total return of VanEck J.P. Morgan EM Local Currency Bond ETF (sovereign bonds) was flat. The EM USD sovereign bond index rose 0.1%. EM corporate bonds and the iShares USD Asia High Yield Bond ETF gained 0.3%.
Given the current EM tight spread levels, markets appear complacent given substantial uncertainties around U.S. tariff policy, global growth risks, and the potential for a higher U.S. inflation.
