.png)
What happened last week?
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 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.
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.
