Investors are digesting the more hawkish-than-expected first FOMC meeting under Chair Kevin Warsh, with officials maintaining a strong focus on persistent inflation risks. Treasury Secretary Scott Bessent expressed confidence in Warsh’s leadership, arguing that growth can accelerate without reigniting inflation as geopolitical pressures ease. However, policymakers remain cautious. Austan Goolsbee warned that core inflation is still running well above target and trending in the wrong direction, while John Williams described inflation as “unquestionably elevated,” citing tariffs, higher energy costs and AI-driven investment demand. Williams expects inflation to ease only gradually, returning to target by 2028. Future market expectations for Fed Fund rates slightly eased last week, from a 60% chance of two 25bp hikes by the end of 2026 to a 40% probability. One rate hike remains fully priced in for October.
Ahead of the ECB’s Sintra symposium, policymakers broadly signaled that inflation is likely to remain above target for longer, while resisting calls for an aggressive tightening response. Christine Lagarde argued that medium-term inflation expectations remain anchored despite the Middle East shock, allowing the ECB to respond flexibly as conditions evolve. Philip Lane, Isabel Schnabel and Boris Vujcic all warned that inflationary pressures, particularly through energy, food and services, remain persistent and could justify further rate increases. Still, market expectations for future ECB rates eased last week, with now no more than one 25bp rate hike priced for 2026.
Bank of England officials also adopted a cautious stance. Alan Taylor argued that rates should remain on hold until geopolitical uncertainty fades, while leaving the door open to faster easing if inflation undershoots. Market expectations for future BoE rates eased in this context, with now a 25bp rate hike in 2026 not even seen as granted (85% probability).
Credit
Investment grade (IG) credit outperformed high yield (HY) last week as lower U.S. Treasury and German Bund yields more than offset modest spread widening. Total returns remained positive across US IG (+0.6%) and EUR IG (+0.4%), but slightly negative among US high yield (HY, -0.1%) and EUR HY (-0.1%). Credit spreads widened across all credit segments, driven by exceptionally heavy June primary issuance.
U.S. IG month-to-date issuance reached a record USD 184 billion for June, temporarily weighing on valuations. Nevertheless, all-in yields remain attractive at 5.1%, still above the one-year average.
Since peace talks now take the centre stage of the US-Iran conflict, investors’ concern for AI bubbles is back, in a Bank of America’s credit survey, but paradoxically, only 2% of the respondents say private credit spillovers are their top concern.
SpaceX has just issued USD 25 billion bonds with maturities up to 30-year, upsized from planned $20 billion to repay a USD 20 billion bridge loan, almost 3 times oversubscribed, but below the average this year of 4 times for USD IG bond issuance.
Fund flows remained constructive, with continued inflows into EUR IG, EUR HY.
U.S. bond issuance is expected to slow towards July 4th, the U.S. Independence Day, and during the silence period before U.S. Big Banks begin reporting from mid-July. Lower bond supply should provide a supportive technical for credit spreads.
Looking ahead, Market technicals should be more supportive over the coming weeks, especially for the U.S. going into July 4th, the national day, and the silence periods before the U.S. banks will kick up earnings in mid-July. As such, healthy all-in yields, resilient inflows and improving market technicals should continue to offset modest spread volatility during the summer months.
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