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What happened last week?
Several central banks held their monetary policy meeting last week, with the most awaited obviously being the Fed. The US central bank cut its policy rate by 25bps to 4.00–4.25%, describing it as a “risk-management cut” amid softening labor market data. Despite inflation remaining above target, Chair Powell emphasized rising downside risks to employment. Only one member dissented—new Governor Stephen Miran, who favored a 50bp cut. Interestingly, the Fed’s updated projections showed slightly higher inflation in 2026 but still lowered the expected path for interest rates through 2027. The dot plot now implies 75bps of cuts in 2025, up from 50bps, though Powell stressed decisions remain data-dependent.
The BoE held rates at 4.0% and maintained its cautious forward guidance. It also slowed the pace of quantitative tightening, reducing its balance sheet runoff target from £100bn to £70bn over the next year, with fewer long-dated gilt sales.
The BoJ kept its policy rate at 0.5% but showed a hawkish tilt. For the first time under Governor Ueda, two board members dissented in favor of a rate hike. The BoJ also announced it will begin selling ETFs and J-REITs, with annual sales of ¥620bn and ¥5.5bn (market value) respectively, signaling a slow exit from crisis-era stimulus.
Other central banks also held their monetary policy meetings last week: the Bank of Canada cut its key rate by 25bp (as expected) to 2.50%, the Norges Bank cut its deposit rate by 25bp to 4.00%, the Bank Indonesia cut its key rate by 25bp to 4.75%, while the Banco Central do Brasil and the South African Reserve Bank held their rate unchanged, respectively at 15.0% and 7.0%.
US Investment Grade spreads have compressed to record tights after the Fed’s latest move. Yields remain sufficiently attractive to sustained investor demand. With the Fed pivoting to easing, inflows into USD credit funds—particularly high yield—have accelerated.
In Europe, corporate bond inflows continued to outpaced government bond funds. Nearly 6% of French Investment grade corporate now yield below French government bond OATs, while three quarters of French corporates reported revenue above pre-pandemic levels.
The surge in Reverse Yankee issuance (US companies issuing EUR bonds) would mean what supports US credits tends to be good news for EUR spreads. The correlation between US credits and EUR credits has risen to a 14-year high.
EUR corporate spreads have tightened to new post GFC (Global Financial Crisis) lows, but EUR real estate sector still offers relative value. Property valuations typically lag rates by at least 12 months, suggesting further price appreciation ahead.
High yield segments outperformed last week. The Vanguard USD Corporate Bond ETF dipped -0.1% and the iShares Core Euro IG Corporate Bond ETF finished flat as U.S. Treasury and German Bund yield edged higher. USD High Yield and EUR High Yield gained +0.3% and +0.4% respectively, supported by tighter spreads.
Demand for all-in yields, combined with improved liquidity in cash bond markets, should keep cash bond spreads structurally tighter than synthetic CDS (credit default swap). In addition, the proposed revisions to G-SIB (globally systematic important banks) capital requirements on derivatives may extend the secular trend of enhanced liquidity in bond markets.
The US Treasury yield curve steepened slightly last week, as resilient macroeconomic data supported a reassessment of long-term rate expectations. The front-end was relatively stable, with 2-year yields up just +1bp to 3.57%, while longer maturities saw more pronounced moves: the 10-year rose +6bp to 4.13% (after briefly trading below 4% post FOMC announcement) and the 30-year was up +6bp to 4.74%. These moves were driven largely by a +4bp increase in real yields, while inflation expectations remained broadly unchanged.
US Treasury ETFs reflected the rise in yields, with most segments posting weekly losses. The iShares 10–20 Year Treasury Bond ETF fell -0.7%, while the broader iShares USD Treasuries ETF lost -0.3%. Shorter-dated maturities were more resilient (iShares 3–7Y -0.1%), while inflation-protected bonds also declined slightly (iShares USD TIPS ETF -0.2%).
In Europe, rates edged higher across the curve. The German 10-year Bund rose +3bp to 2.75%, while French OATs underperformed once again (+5bp to 3.55%) amid persistent political uncertainty surrounding budget negotiations. Most other euro area sovereigns saw smaller upward moves. The iShares Core EUR Government Bond ETF declined -0.1% on the week. In the UK, following a hawkish-leaning Bank of England meeting, Gilt 10y yields were also up (+4bp to 4.72%).
In Japan, the BoJ left rates unchanged at 0.5%, but the split vote sparked a sharp sell-off in local bonds. The 2-year JGB yield jumped +5bp to 0.91% and the 10-year yield rose +5bp to 1.65%, both marking new post-2008 highs.
Emerging market
Emerging market (EM) Sovereign USD bonds slipped last week, led by Argentina’s underperformance, while Ivory Coast and South Africa outperformed.
China’s Q3 GDP slowdown proved milder than expected, supported by resilient exports. Policymakers appear to be delaying further easing to bolster 2026 growth. Meanwhile, the Trump–Xi phone call signaled progress on TikTok, with a meeting planned at next month’s APEC summit and a potential Trump visit to China in early 2026—suggesting bilateral relations may be stabilizing.
EM debt funds posted a 22nd consecutive week of inflows. Bank Indonesia surprised with a 25-basis point (bp) cut to support growth amid easing inflation. Peru’s central bank also cut by 25 bp as inflation in August fell to its lowest in seven years. On the other hand, Brazil’s central bank kept rate unchanged at 15% and signaled it may remain at this level for an extended period to ensure inflation converges towards the 3% target.
Local-currency EM Sovereign bonds continued to lead: the JP Morgan EM Local Currency Bond ETF gained +0.4% on USD weakness. Hard-currency EM sovereign bonds lagged: the iShares EM Sovereign Bond ETF slipped -0.3%.
The iShares EM Corporate Bond ETF edged up +0.1%. Asian high yield outperformed, with the iShares USD Asia High Yield Bond ETF advancing 0.6%.
