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In 2024, the credit market has notably outperformed rates, highlighting a period of resilience and investor favor towards corporate bonds. Yet, with spreads tightening to historic lows and a complex economic backdrop, we ponder the sustainability of this outperformance. How long can credit maintain its edge in the face of potential rate adjustments and economic uncertainties?



Market forecasts and the Federal Reserve's perspective on interest rate cuts have harmonized. This synchronization between market sentiments and the Fed's intentions underscores a shift towards a more balanced risk landscape for fixed income investments.



The fixed income market is currently grappling with the concept of the "Last Smile," a term coined by Isabel Schnabel to encapsulate the intricacies encountered during the last stages of disinflation. Recent adverse movements in January's inflation and Producer Price Index (PPI) data have underscored the challenges of this phase, affecting market sentiment and dynamics.



Recent macroeconomic data have led American and European central bankers to moderate their earlier optimistic projections, impacting bond markets. This recalibration, reflecting ongoing economic resilience, has prompted a reassessment of interest rate paths, contributing to heightened volatility and shifts in global fixed income landscapes.



Following the FOMC meeting, Fed Chair Powell signaled the Fed's reluctance to cut rates in March, emphasizing the need for additional "confidence" in declining inflation figures. This careful stance reflects the ongoing robustness of the American job market, suggesting that a methodical approach is currently favored.



This week's Fixed Income Weekly hones in on the ECB's steady policy with a slight nod towards future rate cuts and solid U.S. economic data, leading to a pronounced steepening in yield curves. These developments are fueled by declining inflation, underlining the resilience of economic trends in a shifting inflationary landscape.



This week, central banks globally face the intricate task of balancing market anticipations with their policy decisions, as they address the aggressive expectations for rate cuts amidst evolving economic landscapes.



In this week's report, we delve into the intriguing dynamics of the US yield curve. A comforting US Producer Price Index (PPI) countering a slight rise in the Consumer Price Index (CPI) has pushed the US 2-year yield to its lowest since May 2023, while long-term interest rates demonstrate stability.



2024's first week veered from 2023's end-of-year bond rally to a sharp sell-off, as widening spreads and rising rates introduced a sobering start. This correction, following the potent rally since mid-October, alongside primary market activities pressuring spreads and rates, underscores the inherent volatility in fixed income markets and sets a cautious tone for January.



The Bloomberg Global Aggregate Index, a barometer for the global fixed income market, has recorded its largest two-month gain ever, marking a significant turnaround. This rally concludes a challenging period, bringing a much-needed positive annual performance close to +6% after two consecutive years of declines.



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