Global rates moved divergently last week, with US yields extending higher while core European sovereigns rallied and Japanese yields surged to multi-decade highs. In the US, Treasuries sold off across the curve: the 2yr rose 5bp to 3.59%, the 5yr climbed 7bp to 3.82%, and the 10yr added nearly 6bp to 4.22%, its highest level since late August. The move was driven partly by political headlines on Friday, as former President Trump signaled reluctance to nominate NEC Chair Kevin Hassett as Fed Chair. Market-implied odds quickly shifted toward Kevin Warsh as frontrunner, reinforcing uncertainty around future Fed leadership. Inflation compensation also edged higher, with 10yr breakevens up 4bp, while real yields rose modestly.
In contrast, sovereign bonds edged lower across much of Europe. German 10yr Bund yields fell 3bp to 2.84%, with similar declines in OATs and a stronger rally in peripherals, as Italian 10yr yields dropped 4bp and Spanish yields fell 3bp. UK gilts were slightly up, with 10yr yields up 3bp.
Japan stood out: 10yr JGB yields jumped 9bp to 2.19%, the highest since 1999, amid political uncertainty and expectations of a snap election. The move weighed on long-duration assets globally, reflected in negative returns across US Treasury ETFs, particularly in the belly and long end.
Emerging market
Emerging market (EM) sovereign USD bonds were weaker amid higher U.S. Treasury yields, although markets such as Colombia and Chile outperformed peers. EM corporate USD bonds have shown resilience in this environment.
The U.S. administration has outlined a three-step plan for Venezuela — stabilisation, recovery of the energy sector and political transition — but recent credit developments are unfavourable for Venezuela’s and its state-owned oil company PDVSA’s bondholders. Trump signed an Executive Order to block any judicial process against Venezuelan oil revenues held in U.S. Treasury accounts, designating them as “Foreign Government Deposit Funds” for U.S. foreign policy purposes and shielding them from private creditor claims.
Oil majors have expressed mixed interest in Venezuelan opportunities. Exxon Mobile considered Venezuela as currently uninvertible until the country makes legal changes to protect foreign investments.
Against this backdrop, EM USD corporate bonds fared better with +0.1% total return last week, while EM local-currency sovereign bonds of +0.3% (The J.P. Morgan EM Local Currency Bond ETF) outperformed hard-currency sovereigns of -0.1% (iShares EM Sovereign USD Bond ETF).
Looking ahead, a weaker US dollars and cooling EM inflation should give some EM central banks greater flexibility to cut rates, notably Brazil and, to a lesser extent Mexico, though geopolitical risks will remain front and center.
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