Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

Central banks

In the United States, President Trump intensified his public pressure on Fed Chair Jerome Powell to deliver a full percentage point interest rate cut. The Federal Reserve, however, remains steadfastly data-driven – a rate cut at the mid-June meeting has effectively been ruled out, with futures assigning virtually 0% probability to any move this month. Early in the week, a few softer economic indicators briefly bolstered market hopes for policy easing in the second half of the year. But those hopes were swiftly tempered on Friday by a surprisingly resilient U.S. payrolls report and stronger-than-expected wage growth, which underscored the labor market’s ongoing strength (and potential inflationary pressure). As a result, investors have pulled back their dovish bets: less than 50 basis points of Fed rate cuts are now priced in for the remainder of 2025. Several Fed officials speaking during the week reinforced a cautious tone, highlighting persistent inflation risks and warning against premature easing. All eyes are now on the Fed’s June 18th FOMC meeting, which will include fresh economic projections, as well as the latest CPI inflation print due around the same time. Across the Atlantic, the European Central Bank delivered its eighth straight 25 bp rate cut, and President Christine Lagarde indicated that the end of the easing cycle is near. Market pricing aligns with this guidance, implying only one more small cut by end-2025. In Switzerland, the Swiss National Bank is widely expected to trim rates on June 19th, prompted by an inflation outlook that has surprised consistently to the downside and a Swiss franc that remains stubbornly strong. Meanwhile, the Bank of England appears inclined to hold fire at its upcoming meeting – traders now anticipate the BoE will wait until August before enacting its next rate reduction, allowing time to assess domestic inflation and growth trends. In sum, global central bankers are striking a patient stance: the Fed and BoE remain on hold for now, even as the ECB and SNB deliver what may be their final cuts – highlighting the delicate balance between taming inflation and sustaining economic activity.

Credit

Credit markets continued to shrug off rising benchmark yields, as a wave of spread tightening more than offset rate headwinds to produce positive total returns across most segments. Investors’ search for yield and confidence in corporate fundamentals drove credit spreads sharply tighter on the week, delivering gains for many bondholders even as government bonds fell. In the U.S., investment-grade spreads tightened by roughly 4 basis points, while high yield spreads compressed by about 22 bps – a significant rally in lower-rated credit. European credit saw a similar move: IG spreads narrowed ~4 bps and euro high yield spreads by around 20 bps, bringing many credit risk premia to their tightest levels of the year. One factor supporting euro credit has been steady demand from fixed-maturity bond funds, which are locking in attractive yields and readily absorbing new issues. European bank debt, including subordinated hybrids and AT1s, also benefited from a strong equity rally in the financial sector, climbing about +0.4–0.5% in price on the week. In fact, BB-rated issuers – which dominate both the U.S. and European high yield universes – led the charge, as higher-quality junk names attracted buyers. There were notable corporate developments as well: steel giant ArcelorMittal was upgraded by S&P, underscoring improving credit trends in some industrial sectors. Meanwhile, U.S. high yield had a brief scare when satellite communications firm EchoStar (rated CCC+ with ~$6bn debt) missed an interest payment, raising the specter of default. However, that idiosyncratic setback did little to dent broader market sentiment. Major credit indices ended the week in the green: a U.S. IG corporate ETF returned about +0.1% (pushing year-to-date gains to +2.2%), U.S. high yield added roughly +0.2% (YTD +2.9%), and euro high yield notched a similar +0.2% (YTD +2.6%), while euro IG was flat-to-slightly down (–0.2% weekly, though still +1.4% YTD). Overall, credit markets’ ability to generate positive returns amid rising rates highlights the ongoing risk-on tone and investors’ preference for carry and spread tightening in the current environment.

Rates

Global bond yields pushed higher over the week, led by a rebound in U.S. long-term rates. The benchmark 10-year U.S. Treasury yield leapt back up to around 4.5% once again in the aftermath of a strong nonfarm payrolls report, erasing its earlier decline and approaching its peak levels of the year. Signs of firmer wage growth, coupled with renewed concerns over inflationary pressures, potential trade tariffs, and the U.S. fiscal trajectory (worries over rising deficits), drove a sharp rise in real yields. Notably, inflation expectations barely budged – breakeven rates held steady – so the surge in nominal yields was almost entirely due to higher real rates. This move caught some bond bulls off guard, as mid-week hopes for Fed rate cuts gave way to a rapid repricing toward a “higher-for-longer” scenario. Longer-duration bonds were hit the hardest: the 10–20 year U.S. Treasury ETF sank about –0.75% on the week, and even intermediate 3–7 year Treasuries lost roughly –0.6%. Inflation-protected securities (TIPS) also fell (around –0.7%), reflecting the jump in real yields. In Europe, government bond yields ticked upward as well after the ECB signaled its easing phase may be nearing conclusion. The iShares EUR 3–7y Government Bond ETF slipped –0.3%, mirroring modest price declines in core Eurozone debt. One standout development was in European periphery spreads: Italy’s 10-year yield spread over Germany tightened to its narrowest point in more than a decade. This multi-year low in the BTP–Bund spread underscores improved market confidence in Italy’s fiscal outlook (and perhaps a relentless search for yield), marking a significant milestone for Eurozone bond convergence. Overall, the week’s rate movements illustrate how quickly sentiment can turn on key data and policy cues – a reminder that even a whiff of sustained inflation or fiscal concern can send yields higher and challenge bond portfolios.

Emerging market

Emerging market bonds had a mostly positive week, with local currency debt leading the pack. Hard-currency EM sovereign bonds managed to advance despite the headwind of rising U.S. Treasury yields. The benchmark EM hard currency index rose about +0.3%, while the widely followed iShares EMB ETF (USD sovereign EM debt) climbed +0.5%. Even EM corporate dollar bonds held steady – the CEMB ETF edged up around +0.1% – as investors continued to seek yield in developing markets. The real standout, however, was local currency emerging debt. The iShares EMLC ETF jumped +0.86%, reflecting both declining local bond yields and a tailwind from appreciating EM currencies (EMFX) against major currencies. Many emerging central banks are further along in their inflation fight, allowing them to begin cutting rates or maintain high carry, which, combined with improved fiscal trends in some cases, bolstered local bond performance. Within EM, Asia high-yield debt remained a weak spot for the second week running. The AHYG Asia high-yield index fell roughly –0.6%, dragged down by ongoing stress in China’s property sector – an overhang that continues to drive defaults and weigh on investor sentiment toward Asian credit. In country-specific developments, Poland’s recent nationalist electoral victory has introduced new uncertainty into its policy outlook and fiscal path, rattling some investors given the prospect of wider deficits or friction with the EU. Conversely, Bulgaria received a green light from the EU to adopt the euro in 2026, marking a positive milestone that could reduce currency risk and support Bulgarian assets. Notably, the ECB’s continued rate cuts may indirectly benefit EM debt as well – ultra-low yields in Europe are pushing more yield-starved investors toward emerging markets, potentially boosting demand for EM bonds (particularly those denominated in euros or offering currency diversification). Overall, emerging market fixed income is attracting interest thanks to its relative value and improving fundamentals, though regional idiosyncrasies like China’s property woes still warrant caution.


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

Credit Spreads Tighten as Yields Rise!

20250610_cowSource: Bloomberg

This week’s most striking fixed income development was the simultaneous rise in government bond yields and tightening of credit spreads. The chart highlights how U.S. 10-year Treasury yields jumped back toward recent highs (around 4.5%) just as high-yield credit spreads (option-adjusted spread, OAS) fell to new lows for the year. This unusual divergence signals a robust risk appetite: investors are demanding less extra yield to hold corporate bonds even while underlying risk-free rates climb. For market positioning, the implication is that credit risk is being embraced – likely reflecting confidence in corporate fundamentals and expectations that central banks will contain inflation without choking off growth. The spread compression has cushioned fixed income portfolios from the hit of rising rates, as tightening credit spreads delivered price gains that offset some of the Treasury losses. Cross-asset dynamics are also at play: the strong rally in credit correlates with equity market strength (for instance, surging bank stocks helped tighten bank debt spreads), illustrating a broad “risk-on” sentiment. The key question is how long this can persist. If yields continue to push higher, credit could face headwinds; but for now, solid fundamentals and investor demand for yield are keeping spreads near their tightest levels in years.

Disclaimer

This marketing document has been issued by Bank Syz Ltd. It is not intended for distribution to, publication, provision or use by individuals or legal entities that are citizens of or reside in a state, country or jurisdiction in which applicable laws and regulations prohibit its distribution, publication, provision or use. It is not directed to any person or entity to whom it would be illegal to send such marketing material. This document is intended for informational purposes only and should not be construed as an offer, solicitation or recommendation for the subscription, purchase, sale or safekeeping of any security or financial instrument or for the engagement in any other transaction, as the provision of any investment advice or service, or as a contractual document. Nothing in this document constitutes an investment, legal, tax or accounting advice or a representation that any investment or strategy is suitable or appropriate for an investor's particular and individual circumstances, nor does it constitute a personalized investment advice for any investor. This document reflects the information, opinions and comments of Bank Syz Ltd. as of the date of its publication, which are subject to change without notice. The opinions and comments of the authors in this document reflect their current views and may not coincide with those of other Syz Group entities or third parties, which may have reached different conclusions. The market valuations, terms and calculations contained herein are estimates only. The information provided comes from sources deemed reliable, but Bank Syz Ltd. does not guarantee its completeness, accuracy, reliability and actuality. Past performance gives no indication of nor guarantees current or future results. Bank Syz Ltd. accepts no liability for any loss arising from the use of this document.

Read More

Straight from the Desk

Syz the moment

Live feeds, charts, breaking stories, all day long.

Thinking out loud

Sign up for our weekly email highlighting the most popular posts.

Follow us

Thinking out loud

Investing with intelligence

Our latest research, commentary and market outlooks