--- title: U.S. Real Yields Soar as Trump’s Fiscal Reforms Take Center Stage—Can They Bring Rates Down?! description: With long-term U.S. real yields hitting cycle highs near 2.5%, the Trump administration’s initiatives aim to restore fiscal credibility and lower borrowing costs—but execution risks remain high. 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If you made a mistake, please change here USA Country Switzerland Canada: Other than Ontario, Quebec, Alberta Canada: Ontario, Quebec or Alberta USA Other country Language Language English French German Italian I confirm Legal information 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. 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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. [Weekly Fixed Income](https://blog.syzgroup.com/fast-food-for-thought/tag/weekly-fixed-income) ### U.S. Real Yields Soar as Trump’s Fiscal Reforms Take Center Stage—Can They Bring Rates Down?! With long-term U.S. real yields hitting cycle highs near 2.5%, the Trump administration’s initiatives aim to restore fiscal credibility and lower borrowing costs—but execution risks remain high. Meanwhile, global central banks and markets react to inflation surprises, BOE rate cuts, and deepening trade tensions. [![Gaël Fichan](https://blog.syzgroup.com/hubfs/gael.jpg)](https://blog.syzgroup.com/fast-food-for-thought/author/gaël-fichan) [**Gaël Fichan**](https://blog.syzgroup.com/fast-food-for-thought/author/gaël-fichan) Head Fixed Income & Senior Portfolio Manager **Monday, 02/10/2025** | - ![Pdf](https://blog.syzgroup.com/hubfs/pdf%20(1).png) - - - - ## **What happened last week?** **Central banks** **BoE’s Dovish Shift, ECB Steady, and the Fed Holds Firm Amid Strong U.S. Data!** Last week, the Bank of England (BoE) took center stage, cutting its key rate by 25bps to 4.50%, as widely expected. However, the communication surrounding the decision leaned dovish, with two of nine MPC members voting for a more aggressive 50bps cut. The BoE also downgraded GDP growth forecasts, reflecting persistent economic weakness. Yet, inflation remains stubborn, particularly in wages and services, forcing the central bank into a stagflationary dilemma. The BoE now expects 2025 inflation at 3.5% (vs. 2.8% prior)—well above target—making further rate cuts highly dependent on inflation easing in the months ahead. Markets are pricing 25bp cuts at the May and August meetings, but beyond summer, rate expectations remain uncertain, with only a 45% probability of another cut in Q4 as inflation risks linger. In the Eurozone, disinflation is progressing more clearly due to weak economic growth, though rising energy prices could trigger a temporary inflation uptick in spring. Several ECB policymakers voiced confidence that inflation will soon hit the 2% target, reinforcing the outlook for continued rate cuts. The ECB released research suggesting that the neutral rate is between 1.75%-2.25%, aligning with market expectations that the Deposit Rate will be lowered to 1.75% by year-end. With at least three, potentially four, 25bp cuts ahead, markets remain steady in their ECB outlook. Meanwhile, U.S. economic data remains resilient, reinforcing the Federal Reserve’s cautious stance. The Unemployment Rate fell to 4%, the lowest since May 2024, while wages saw their strongest monthly increase in five months (+4.1% YoY). These factors confirm the Fed’s January message: no urgency to cut rates. Rate cut expectations rose midweek after a weak ISM Services report and Treasury Secretary Scott Bessent’s comments on energy prices, but reversed as markets absorbed stronger labor data. Futures now price -40bps of cuts by year-end, with a July rate cut fully priced in and a 60% chance of another by December. These moves highlight a divergence in monetary policy paths, as EM central banks front-load easing while the Fed, ECB, and BoE navigate a far more complex inflation landscape. **Credit** **Resilience Amid Tariff Volatility, High-Yield Outperforms.** Despite tariff-related volatility, credit markets remained remarkably stable, with only a few tariff-sensitive sectors, such as European autos and retail, underperforming within EUR investment grade (IG). In contrast, U.S. IG autos, retail, and consumer products credit remained resilient, with spreads holding firm both in absolute terms and relative to their equity counterparts. While tariffs will inevitably impact corporate earnings in specific industries, their effects tend to materialize faster in equity valuations than in credit spreads. Companies often absorb tariff-related costs through currency adjustments, supply chain shifts, and strategic pricing, mitigating immediate risks to credit fundamentals. However, sector dispersion is set to rise, with greater volatility in credit spreads for companies directly exposed to higher import costs. A notable example is S&P’s negative outlook on Ford, which highlights the unintended consequences of Trump’s tariff policies on domestic manufacturers. Ford, despite producing fewer vehicles in Mexico than GM, relies heavily on imported auto parts, a key vulnerability given that some components cross the U.S.–Mexico border up to seven times during assembly. This underscores the potential long-term supply chain disruptions that tariffs could impose. Despite these concerns, U.S. investment-grade credit remained resilient, with the Vanguard USD Corporate Bond ETF rising +0.1% for the week, extending its +0.5% gain from the previous week. High yield (HY) outperformed, as U.S. HY spreads tightened by 1bp to 267bps, marking a 25bps compression year-to-date. The iShares Broad USD High Yield Corporate Bond ETF continued its strong performance, up +1.4% year-to-date. In Europe, credit markets also showed stability, with EUR IG spreads widening by just 1bp to 91bps, still 10bps tighter year-to-date. Euro HY spreads tightened further by 6bps to 296bps, reflecting strong demand despite market turbulence. The iShares Core Euro IG Corporate Bond ETF rose modestly, adding to its +1.0% gain from the previous week, while the iShares Euro HY Corporate Bond ETF advanced +0.1%, supported by light new bond issuance. High-beta credit continued to outperform, with the WisdomTree AT1 CoCo ETF climbing +0.5% for the week (+1.7% year-to-date) and European corporate hybrids gaining +0.9% (+1.2% year-to-date). While tariff-driven equity volatility has dominated headlines, its impact on credit remains measured, though spread dispersion is expected to rise as companies navigate longer-term earnings and supply chain pressures. Investors should stay alert to sector-specific risks, particularly in autos, industrials, and consumer goods, as trade tensions evolve. **Rates** **Treasury Rally Strengthens Amid Tariff Concerns, While JGBs Hit 14-Year Highs!** Government bonds extended their rally last week, with long-duration bonds outperforming while the front end remained flat. The iShares USD Treasuries ETF gained +0.3%, as the iShares 10-20 Year Treasury Bond ETF surged +1.5%, while shorter maturities lagged, with the iShares 3-7 Year Treasury Bond ETF unchanged. The move was driven primarily by tariff fears, which have already impacted inflation expectations, now soaring above 3% for the first time in two years. Meanwhile, mixed U.S. economic data weighed on longer-end yields, with the U.S. economic surprise index dropping to zero, reinforcing concerns over growth. As a result, the U.S. yield curve flattened by 13bps to 20bps, signaling a shift in market sentiment. The 10-year U.S. Treasury yield ended the week at 4.50%, down 4bps from the previous week, reflecting investor demand for safe-haven assets amid rising geopolitical and economic uncertainty. In Europe, inflation data took center stage as Eurozone CPI unexpectedly rose to 2.5% in January (from 2.4% in December), keeping the core inflation rate elevated at 2.7%. While services inflation dipped slightly to 3.9% from 4%, ECB President Christine Lagarde dismissed concerns, attributing the uptick to base effects from energy prices. However, the ECB’s main wage growth indicator signaled a sharp slowdown ahead, bolstering confidence that inflation will ease further, keeping the door open for rate cuts. European government bonds responded positively, with the iShares Core EUR Govt Bond ETF gaining +0.7% last week. In the UK, gilts rallied on the BoE’s rate cut, pushing the Vanguard U.K. Gilt ETF up +0.7%, extending its year-to-date gains to +1.7%. However, the worst performer of the week was Japanese bonds, as yields climbed further. The 10-year JGB yield breached 1.30% for the first time since 2011, reflecting persistent inflation pressures and the BoJ’s tightening stance. The iShares Core JP Government Bond ETF lost -0.5%, marking another challenging week for Japan’s fixed income market. With tariff-driven inflation fears escalating and global monetary policies diverging, volatility in rates remains high. Investors are watching closely as inflation expectations continue to rise, pressuring central banks to carefully navigate their next moves. **Emerging market** **Rate Cuts Accelerate, Credit Spreads Hit Cycle Lows.** Emerging market (EM) bonds continued their strong run last week, supported by falling U.S. interest rates, a resilient global economy, and accelerated monetary easing across key EM central banks. The Reserve Bank of India cut its benchmark rate by 25bps to 6.25%, while Banco de México lowered its key rate by 50bps to 9.50%, citing slowing inflation and rising U.S. trade tensions. EM hard currency bonds benefited from both spread tightening and rate-driven duration gains. The iShares Emerging Market Sovereign Bonds ETF climbed +0.6% for the week, as spreads narrowed by 8bps to a new cycle low of 234bps. EM corporate bonds also outperformed, with the iShares Emerging Market Corporate Bonds ETF rising +0.3%, supported by a 4bps tightening in spreads to 205bps. Notably, Asian high-yield debt surged, with the iShares USD Asia High Yield Bond ETF up +1%, despite the 10% tariff on Chinese goods imposed by the Trump administration. This suggests that investors remain confident in the region's ability to absorb the economic impact of new trade restrictions. Overall, EM credit continues to benefit from improving global liquidity conditions, with central banks in India and Mexico leading the way in monetary easing. However, rising geopolitical risks and trade tensions remain key factors to monitor, as the next phase of U.S. tariff policies could impact export-driven EM economies. --- ## **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** **U.S. Real Long-Term Yields Hit Cycle Highs—Can Fiscal Reforms Bring Them Down?**       ![20250210\_cow](https://blog.syzgroup.com/hs-fs/hubfs/20250210_cow.png?width=613&height=398&name=20250210_cow.png) Source: Bloomberg Long-term real yields on U.S. Treasuries have climbed to their highest levels in this cycle, reflecting inflation concerns, record-high government debt, and fiscal uncertainty. With 10-year real yields nearing 2.5%, the new Trump administration is pushing for aggressive reforms to bring them down.  \-    Bessent’s 3-3-3 Plan aims to restore fiscal credibility through: 3% Deficit-to-GDP Target – A sharp reduction from 6%, slowing debt accumulation. 3% Real GDP Growth – Fueled by tax incentives, deregulation, and energy expansion. 3M Barrels/Day Increase in U.S. Oil Production – To lower energy costs and curb inflation. \-    DOGE (Decentralized Open Government Expenditure) is an ambitious initiative to track and automate U.S. government spending using blockchain technology—aiming to increase transparency, reduce fraud, and enforce spending caps through automated oversight. Markets remain skeptical. If these policies restore fiscal discipline, they could drive long-term real yields lower, but execution risks remain high. The battle over U.S. borrowing costs is just beginning. #### 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 ## Related Articles [Fixed Income|](https://blog.syzgroup.com/fast-food-for-thought/tag/fixed-income) [Weekly Fixed Income](https://blog.syzgroup.com/fast-food-for-thought/tag/weekly-fixed-income) #### [The Short End of the Curve Offers Value](https://blog.syzgroup.com/fast-food-for-thought/the-short-end-of-the-curve-offers-value?hsLang=en) The significant policy tightening priced in offers high carry and a favorable balance of probabilities. **[Christophe Pella, CFA](https://blog.syzgroup.com/author/christophe-pella?hsLang=en)** | 17/09/2026 [Fixed Income|](https://blog.syzgroup.com/fast-food-for-thought/tag/fixed-income) [Weekly Fixed Income](https://blog.syzgroup.com/fast-food-for-thought/tag/weekly-fixed-income) #### [Debt Magic and Debt Management](https://blog.syzgroup.com/fast-food-for-thought/debt-magic-and-debt-management?hsLang=en) Market support mechanisms and accounting creativity are no substitute for improved fundamentals. **[Christophe Pella, CFA](https://blog.syzgroup.com/author/christophe-pella?hsLang=en)** | 09/09/2026 [Weekly Fixed Income](https://blog.syzgroup.com/fast-food-for-thought/tag/weekly-fixed-income) #### [A hawkish Jackson Hole speech flattens yield curves](https://blog.syzgroup.com/fast-food-for-thought/a-hawkish-jackson-hole-speech-flattens-yield-curves?hsLang=en) With rising chances of rate hikes, short-term rates rise while long-term rates stabilize **[Maggie Cheng, CFA, CAIA](https://blog.syzgroup.com/author/maggie-cheng?hsLang=en)** | 01/09/2026 ## Straight from the Desk # Syz the moment Live feeds, charts, breaking stories, all day long. 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