.png)
What happened last week?
The US Federal Reserve did not change its current policy stance and kept its key rates unchanged at 4.25%-4.5% at the last meeting (30 July) as widely expected. Two of the seven Federal Open Market Committee (FOMC) governors - Michelle Bowman and Christopher Waller, both Trump appointees – dissented, voting in favour of a 25-basis point cut. Despite this lack of unanimity, the FOMC’s statement emphasised that the majority of members deem the current policy stance as appropriate.
Initially, the prospect of a September rate cut diminished following the press conference, but market expectations shifted dramatically following the release of very weak July payroll data.
Elsewhere, major central banks such as the Bank of Japan (BoJ), the ECB and the Bank of Canada also held rates steady at recent meetings. However, the BoJ raised its inflation outlook, setting a rather “hawkish” signal for a more restrictive monetary policy at some point in the future.
The unexpectedly steep 39% tariffs on Swiss imports have taken Swiss officials by surprise. This may intensify pressure on the Swiss National Bank and potentially reviving the prospect of a return to negative interest rates.
Among the larger emerging markets, the Banca Central do Brazil maintained its benchmark rate at 15% but will face heightened challenges after the U.S. imposed on about half of the Brazilian exports to the U.S at stunning 50%.
Next week, market attention will turn to the Bank of England meeting, where consensus points to a rate cut. Meanwhile, the Mexican central bank is also expected to make a step lower. The Reserve Bank of India is widely forecast to hold rates steady.
Credit markets were unsettled by a wave of tariff announcements, but falling Treasury yields more than offset widening credit spreads, resulting in positive total returns for US investment grade (IG) bonds.
The US imposed a 39% tariff on Swiss imports—well above expectations—which led to a notable weakening of the Swiss franc against the dollar.
Earlier in the week, markets were buoyed by a new EU-US trade deal. The US set auto tariffs at 15%, far below initial threats, in exchange for EU commitments to purchase US energy, AI chips, and military equipment. As a result, EUR IG autos outperformed both last week and year-to-date.
The 50% tariff on copper will exempt concentrates – raw materials such as copper ores and scrap - making the effective sector impact more moderate than feared.
S&P upgraded Digital Realty to BBB+ and American Tower, while assigning a positive outlook to Cellnex, highlighting the sector’s strong fundamentals and predictable cash flows.
EUR IG funds saw their largest weekly inflow since September 2024, while money market funds posted the biggest outflow in 18 weeks.
By the end of the week, credit spreads widened across both U.S. and European corporates, with significant widening in U.S. High Yield (HY).
Credit spreads widened on both sides of the Atlantic last week, with US HY seeing the most significant move. US IG spreads rose 4 bps to 82 bps (HY +29 bps to 313 bps), but US IG ETFs gained +0.6% for the week (+4.5% YTD) amid lower Treasury yield. Euro IG spreads widened 2 bps to 81 bps, and Euro HY 3 bps to 281 bps, with Euro IG ETFs up 0.1% (+2.1% YTD) and Euro HY ETF down 0.1% (+3.3% YTD).
Riskier segments edged lower to stable: euro hybrids lost 0.1% (+3.5% YTD), while AT1s were flat (+5.1% YTD).
Despite last week’s widening, credit spreads remain historically tight. Light summer issuance may keep them contained, but the September supply wave could test market resilience if rally fatigue sets in.
US interest rates experienced significant volatility last week. The disappointing July payroll data triggered sharp moves across the US Treasury curve: the 2-year yield dropped 24 basis points to 3.68%, while the 10-year yield declined 17 basis points to 4.22%. In contrast, the 10-year German Bund was rather stable.
The weaker-than-expected US jobs report—non-farm payrolls rose just 73,000 versus expectations of 104,000, and unemployment edged up to 4.2%—prompted markets to swiftly reprice expectations for Fed rate cuts. September now appears poised for a cut, with debate shifting between a standard 25-basis-point move and a potential 50-basis-point "jumbo" cut.
Meanwhile, US core PCE inflation for Q2 came in at 2.8% year-over-year, slightly above forecasts.
German Bund yields also declined, but far less dramatically than their US counterparts: the 2-year yield fell by just 2 basis points, while the 10-year slid 4 basis points.
In the euro area, headline CPI for July slightly exceeded expectations at 2.0% year-over-year.
In Switzerland, CHF rates fell sharply in response to the 39% tariff announcement. The Swiss Confederation 2-year yield declined by 5 bps to -0.18%, while the 10-year yield dropped 12 bps to 0.29%.
In Japan, the 10-year JGB yield retreated by 10 bps to 1.5%, after briefly reaching a 16-year high of 1.6%.
Emerging market
Emerging market (EM) sovereign dollar bonds posted gains last week, supported by falling US Treasury yields. Mexico and Argentina were among the outperformers.
Mexico faces 25% tariffs, but with USMCA-compliant goods exempted, the effective tariff rate will be high single digit.
BRICS countries—Brazil, Russia, India, China, and South Africa—voiced strong opposition to the tariffs. In particular, the 50% tariff on Brazil and 30% on South Africa appear to serve political aims: the former is to pressure President Lula related to the prosecution of former President Bolsonaro, while the latter targets South Africa over alleged discrimination against the Afrikaner white minority.
Brazil sovereign bonds underperformed following the 50% US tariff announcement. However, extensive carve-outs on key Brazilian exports—including aircraft, wood pulp, energy, fertilisers and orange juice — will face only a 10% tariff. This is a notable relief for Embraer, with 63% of its aircraft exports destined for the US.
India was hit with a 25% tariff, explicitly linking its purchases of Russian oil and arms.
Global EM debt funds saw continued inflows. The VanEck J.P. Morgan EM Local Currency Bond ETF slipped 0.5% last week amid dollar strength, while EM USD sovereign and corporate bond indices each rose 0.4%. The iShares USD Asia High Yield Bond ETF fell 0.6%.
Credit spreads remain compressed, warranting greater selectivity and a more cautious approach.
