Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

Central banks

BoJ Takes the Spotlight with a Historic Hike, While Fed Faces Political Crosswinds!

Last week, the Bank of Japan (BoJ) was front and center, delivering a historic 25bp rate hike that brought its short-term policy rate to 0.50%. This marks only the third time in the past three decades that Japanese rates have reached such levels, with previous episodes spanning 1995-1998 and briefly in 2007-2008. Accompanying this expected move, the BoJ revised its growth and inflation forecasts upward, fueling market speculation about the possibility of another hike later this year, which would push rates to their highest level since 1995. This marks a significant moment for a country long defined by near-zero rates and deflationary struggles, signaling a cautious but notable shift in Japan’s monetary policy stance. Across the Pacific, the U.S. saw a quieter week for monetary policy, with Federal Reserve members observing their pre-FOMC blackout period and a lack of impactful economic data. However, Donald Trump’s inauguration as President quickly reignited debates over the Fed’s independence. The newly minted President wasted no time inserting himself into monetary policy discussions, declaring that “interest rates should drop immediately” and going as far as stating that he knows "interest rates much better" than Fed Chair Jerome Powell. Trump’s comments nudged market expectations slightly, with futures pricing in 42bps of rate cuts by the end of 2025, up from 38bps the week prior. While no surprises are expected at this Wednesday’s FOMC meeting—where a status quo on Fed Funds rates is widely anticipated—all eyes will be on Powell’s press conference and his potential response to Trump’s pointed remarks. The Fed Chair will need to balance a neutral tone with a firm defense of the central bank’s independence, a narrative that could dominate market sentiment in the weeks ahead. In Europe, ECB officials conveyed cautious optimism, reinforcing their easing bias while nuanced differences between hawks and doves persisted. Encouraging January PMI activity data tempered 2025 rate cut expectations slightly, with markets now pricing -88bps of cuts by year-end, compared to -100bps a week earlier. However, this shouldn’t derail expectations for a widely anticipated 25bp rate cut at Thursday’s ECB meeting. Meanwhile, in Switzerland, SNB President Martin Schlegel struck a reassuring tone on inflation. He reiterated that while the SNB dislikes using negative rates, it would not hesitate to deploy them if necessary and emphasized the central bank’s readiness to intervene in FX markets should conditions require it. Markets remain confident that Swiss cash rates will head toward zero in 2025, reflecting the SNB’s commitment to navigating inflationary pressures while supporting economic growth. 

Credit

Tighter Spreads and Strong Technicals Propel Solid Performance.

Credit markets demonstrated resilience last week, as tighter spreads pushed credit indexes further into positive territory for the year. U.S. investment-grade (IG) credit performed well, benefiting from a 2bps tightening in spreads and support from U.S. Treasury gains. The Vanguard USD Corporate Bond ETF advanced +0.3% for the week, reflecting the positive dynamics. In high yield (HY), the performance was even stronger, with spreads tightening by 6bps to 256bps—the tightest levels seen this year. The iShares Broad USD High Yield Corporate Bond ETF gained +0.3% for the week, bringing its year-to-date performance to +1.4%. Primary markets continued to display robust demand, with new issuance met by strong investor interest and negative average new issue concessions (NICs) highlighting favorable technical conditions. Credit fund flows were equally supportive, with inflows into both IG and HY funds accelerating, underscoring continued investor confidence. European credit markets outperformed their U.S. counterparts as recovering economic momentum spurred optimism. Investment-grade spreads tightened by 3bps to 95bps, the narrowest level since December 2021, while HY spreads contracted by 7bps to 308bps, marking their lowest point this year. The iShares Core Euro IG Corporate Bond ETF was flat for the week, while the iShares Euro HY Corporate Bond ETF rose +0.2%. European HY’s stronger performance reflects its lower duration risk and tighter credit spreads, enabling it to turn positive year-to-date, while IG remains down -0.5%. High-beta credit segments led the charge. CoCo bonds posted impressive returns, with the WisdomTree AT1 CoCo Bond ETF gaining +0.3% for the week and up +0.7% year-to-date. This aligns with the strong performance of European bank equities, which are up more than +9% in 2025. European corporate hybrids also outperformed, rising +0.2% for the week and turning flat year-to-date. Notably, the average spread for corporate hybrids in Europe fell below 200bps—the lowest level since 2021—reflecting robust investor demand and improved market conditions. Credit markets remain buoyed by strong technicals, supportive inflows, and resilient corporate fundamentals. However, with valuations tightening and rates remaining volatile, investors will need to remain selective as they navigate potential challenges ahead.
Rates

Government Bond Markets Steady Amid Trump's Inauguration and BoJ Policy Shift!

Global bond markets experienced another volatile week, marked by Donald Trump’s inauguration and mixed economic data. Despite the turbulence, U.S. Treasury yields held steady, with the 10-year yield ending flat at 4.62%. The front end of the curve outperformed as the 2-year yield dropped 3bps to 4.26%, supported by weaker-than-expected U.S. Services PMI data and Trump’s forceful rhetoric on interest rates. Speaking to the World Economic Forum in Davos, Trump demanded an immediate rate cut, raising concerns over political interference in Federal Reserve policy. These comments, combined with a soft economic outlook, contributed to a slight steepening of the U.S. Treasury yield curve (2s10s), which widened by 2bps to 35bps. The U.S. Treasury market showed mixed performance. The iShares 3-7 Year Treasury Bond ETF rose +0.1%, turning positive year-to-date, while the iShares 10-20 Year Treasury Bond ETF was flat, leaving it down -0.2% for the year. Treasury markets are also grappling with the prospect of record debt maturities in 2025, as incoming Treasury Secretary Scott Bessent faces the challenge of addressing a $10 trillion debt stack, a factor likely to weigh on sentiment throughout the year. In the UK, gilt markets extended their rally, driven by softer inflation and growth data. The 10-year Gilt yield declined by 4bps to 4.62%, while the 2-year yield fell 6bps to 4.32%. Gilt benchmarks benefited from their high-duration profiles, with the Vanguard U.K. Gilt UCITS ETF posting a +0.4% weekly gain. Further support came from technical adjustments, with January seeing a significant +0.23-year extension in UK benchmark bond durations, adding demand for long-dated gilts. Eurozone bonds underperformed following a surprising rebound in economic data. The HCOB Eurozone Composite PMI returned to expansion territory, lifting the 10-year German Bund yield by 6bps to 2.57%. The iShares Core EUR Govt Bond ETF slipped -0.1% for the week, leaving it down -0.9% year-to-date. Spreads narrowed across France and peripheral bonds, with the France-Germany 10-year spread tightening by 5bps to 73bps, supported by record demand for France’s 15-year bond auction. In Japan, the BoJ’s 25bp rate hike pushed the 10-year JGB yield to 1.23%, its highest level since 2008. This policy shift underscores the BoJ’s continued normalization amid global monetary tightening, with volatility expected to persist in the weeks ahead.

Emerging market

Strong Gains Across Key Segments.
Emerging market (EM) bonds delivered a solid performance last week, buoyed by declining U.S. interest rates, a weaker dollar, and the absence of major trade tariffs from the Trump administration. The iShares Emerging Market Sovereign Bonds ETF rose +0.4%, while the iShares Emerging Market Corporate Bonds ETF added +0.2%. Local currency debt stole the spotlight, as a 2% decline in the dollar propelled the VanEck J.P. Morgan EM Local Currency Bond ETF to an impressive +3% gain for the week. EM corporate spreads tightened to 207bps (-4bps), and sovereign spreads narrowed by 6bps to 242bps, reflecting strong investor demand. In China, the property sector showed signs of stabilization, with S&P noting that the market may have reached its bottom. Surging secondary sales are expected to support recovery by the second half of 2025. This optimism lifted the iBoxx USD Asia China Real Estate High Yield Bond Index by +3.7% last week, though it remains slightly negative year-to-date at -0.2%. Egyptian sovereign USD bonds also performed well, supported by a ceasefire between Israel and Hamas that may reduce tensions in the Middle East. The ceasefire is expected to facilitate the resumption of maritime operations through the Suez Canal, a critical revenue stream for Egypt. Yemeni Houthi groups have temporarily halted their attacks on merchant vessels in the Red Sea, which had caused Suez Canal revenues to drop by 60% compared to the same period last year. If stability holds, Egypt’s fiscal deficit—projected by the IMF to hit 10.1% of GDP this year—could improve, according to CreditSights. Meanwhile, Colombia faced fresh turbulence, with 5-year CDS spreads jumping by 10bps to 2025 following President Trump’s announcement of 25% tariffs on Colombian goods. The move came in response to President Petro’s refusal to allow deported migrants’ planes to land. Petro retaliated swiftly, imposing matching tariffs on U.S. imports. This escalating trade conflict poses risks for Colombia’s export-dependent economy and may weigh on its bond performance in the weeks ahead. Despite isolated challenges, the broader EM debt market continues to attract investors with its compelling yields and improving fundamentals. However, geopolitical tensions and policy risks remain critical factors to monitor as the year progresses.


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
NEGATIVE
We have turned negative on Emerging Marke debt, driven by the strength of the dollar and rising US real yields. EM corporate spreads have reached very tight levels, which considerably reduces the margin of safety. Additionally, there are persistent negative capital flows and an increase in short interest in USD-denominated EM debt, indicating growing market pessimism. However, we still see value in bonds with maturities of up to 4 years and yields exceeding 6.0%.

The Chart of the week

European Investment Grade Spreads Tighten to Four-Year Lows!      

20250127_cow

Source: Bloomberg

European IG corporate spreads narrowed to 95bps last week, marking their lowest level since December 2021. This reflects a combination of improving short-term confidence and strong technical demand in the European credit market. Rising sovereign yields, driven partly by U.S. Treasury rate movements, have compressed credit risk premiums. While U.S. economic continues to be resilient, the outlook for Europe remains more fragile, weighed down by subdued growth prospects and ongoing fiscal challenges. Nonetheless, the stability of French policy under the Bayrou government has provided a measure of reassurance, adding support to European credit markets. The HCOB Eurozone Composite PMI also returned to expansion territory at 50.2, signaling a tentative improvement in economic activity. However, spreads at these levels highlight a fine balance—credit markets remain vulnerable to any negative surprises, whether from slower-than-expected growth or geopolitical risks. As European spreads tighten further, investors face a challenging landscape of lower compensation for higher risks.

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