Two major central banks have hiked interest rates so far in June, while the all-important first Fed meeting of new Chair Warsh looms.

The ECB raised its key rates by 25bp, lifting the deposit rate to 2.25%, with Lagarde confirming the decision was unanimous. The move was driven primarily by higher inflation projections, headline inflation revised up to 3.0% for 2026 and 2.3% for 2027, with core inflation also lifted to 2.5% for both years, largely reflecting elevated energy prices tied to the Middle East conflict. Growth forecasts were trimmed only modestly. Lagarde described the hike as "robust" across scenarios rather than a one-off "insurance" move, though she stopped short of signaling a hiking cycle. Risk assessments remained skewed toward downside growth and upside inflation, with new language on tighter credit supply and financial stability. Markets showed little reaction, having largely priced in the move. Following the decision and the US-Iran agreement over the weekend, future markets have lowered their additional rate hike expectations. They now price one additional 25bp hike by October, and only a 20% probability of a third hike in 2026.

The Bank of Japan raised its key rate by 25bp to 1.00% in an almost unanimous decision (7-1). Here too, concerns around building inflationary pressures drove the decision. The BoJ struck a balanced tone after this decision, signaling on the one hand that it was ready to continue to hike rates later this year, while maintaining a cautious tone and continuing on its JGBs purchase program. Future markets continue to price an 80% chance of another 25bp rate hike by the BoJ before the end of the year.

Ahead of this week’s meetings of the Fed, BoE and SNB, future markets expect no rate hike at this stage for those three central banks. Beyond this week, future markets price at least one rate hike by the BoE in H2 2026 (and a 20% probability of two), a 20% probability of a rate hike by the SNB and an 85% probability of a Fed rate hike by the end of 2026. Those probabilities have gone down after the US-Iran agreement announced over the weekend.

Credit

Credit market performance was positive last week despite the ECB’s first 25 bp rate hike since 2023. Total returns were positive across all major credit segments, recovering from the previous week’s losses as U.S. Treasury and German Bund yields declined. Risk sentiment received a further boost on Monday following the announcement of a US-Iran peace agreement expected to be signed this Friday, potentially leading to 60-day negotiations.

Credit spreads were broadly stable across developed markets, with US HY modestly tightening while EUR HY slightly lagged. Investors increasingly focused on a potential de-escalation in the Middle East. Given repeated disappointments since April, positioning remains cautious, leaving room for further tightening in European credit should tensions continue to ease, especially as slowing bond issuance improves technicals.

EUR investment grade funds recorded a seventh consecutive week of inflows, while EUR HY saw its first outflow after eight weeks of positive flows. Year-to-date, riskier segments including US HY and AT1s have outperformed.

We continue to view the combination of attractive all-in yields and potentially lower rate volatility as supportive for credit markets. While multi-year high Bund yields have recently attracted flows into government bond funds, retail demand for corporate bonds remains resilient.

A durable peace scenario would favour cyclical sectors over defensives. Longer term, AI infrastructure, data centres, renewables and defence spending continue to support credit demand. European bank credit remains supported by strong fundamentals, while corporate EBITDA margins reached their highest level since September 2023, reinforcing a constructive backdrop for credit.