Sovereign bond markets rallied over the week, as easing concerns around an energy-driven inflation shock supported a broad decline in yields across major economies. In Europe, the shift in monetary policy expectations was particularly pronounced: the probability of an April ECB rate hike dropped sharply from 34% to just 9%. This repricing drove a significant bull steepening in core curves, with German 2-year Bund yields falling 19bps to 2.41%—their largest weekly decline since April 2025—while 10-year yields declined 10bps to 2.96%.
Peripheral spreads also tightened amid the rally, with 10-year yields in France (-13bps), Italy (-17bps), Spain (-13bps), Portugal (-12bps), and Ireland (-12bps) all moving lower. In the US, Treasuries followed suit as markets increasingly priced in policy easing, with the implied probability of a Fed rate cut by December rising to 61% from 26% the prior week. Yields declined across the curve, led by the front end (2-year -9bps), while 10-year yields fell 7bps to 4.25%. Both real yields (-4bps) and breakevens (-3bps) edged lower.
Performance across fixed income ETFs was positive, particularly in longer-duration segments, reflecting the supportive rate backdrop.
Emerging market
Emerging market (EM) sovereign USD bonds posted another strong rebound last week. Argentina, Colombia and Hungary were among the outperformers, while China and Romania lagged, albeit still recording moderate gains.
EM corporate credits followed a similar recovery trend. Latin American high yield corporates have proved the most resilient segment, as they benefit from energy producer returns and the conflict hit corporates differently across regions. The worst performers were property and energy companies directly exposed to the conflict.
Global EM funds recorded their first weekly inflow after five consecutive weeks of outflows.
Higher oil prices have supported the rally in Venezuela and PDVSA bonds. However, the market might have overlooked the government’s prioritisation of reconstruction and imports over servicing legacy debt, with rising imports potentially weighing on repayment capacity.
In its first 100 days, the Venezuelan government under Delcy Rodríguez has accelerated the reopening of the oil and gas sector, supported by U.S. licences allowing Chevron, Shell and Repsol to expand joint ventures with PDVSA.
However, President Trump’s Executive Order has restricted any private credit claims on Venezuela’s oil revenue, which is the only real USD source. At the same time, significant operational hurdles persist, including power shortages, lack of diluent to Venezuela’s heavy crude, insufficient storage capacity and equipment. A recovery in oil production to the ~3.5 million barrel per day (bpd) levels seen in the 1990s could take at least one to two decades, from currently 990,000 bpd.
Given the commodity-driven nature of these economies, improved fiscal discipline, and generally conservative corporate balance sheets, EM credits could remain resilient, provide that credit selection remains rigorous.
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