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What happened last week?
Global central banks remain in an easing stance, with 168 rate cuts over the past year, the fastest pace since 2020 and third-highest in 25 years. Despite global dovishness, the U.S. Federal Reserve remains cautious. A potential government shutdown is unlikely to sway the Fed for now, though a prolonged disruption could prompt risk-management cuts, particularly if it dampens consumption or clouds labor and inflation data.
In political developments, the U.S. Supreme Court rejected former President Trump's request to immediately remove Fed Governor Lisa Cook, keeping her in place until January hearings. Meanwhile, Treasury Secretary Bessent signaled that Fed candidate interviews are progressing, with several names soon to be presented for consideration.
Data-wise, U.S. indicators were mixed: the ADP report showed job losses in September, though alternative data suggested payroll gain. Friday’s ISM services index fell sharply to 50.0, raising stagflation fears, particularly as prices paid unexpectedly rose.
Markets leaned dovish, with Fed rate cut pricing by year-end increasing to 46bps, and the probability of an October cut at 96%.
Elsewhere, the SNB intervened in FX markets for the first time in over three years, while the RBA and RBI held rates steady.
U.S. credit markets were surprisingly resilient last week amid the US government shutdown. Treasury yields fell across the curve on weaker-than-expected labour data. Credit spreads showed only limited widening in high yield, while investment grade spreads remained stable—more than offset by the lower Treasury yields. Total returns were positive across U.S. credit, with investment grade outperforming on the back of lower Treasury yields.
In Europe, credit market performance was also solid. EUR investment grade spreads were broadly stable, while high yield tightened modestly despite the uptick in euro area inflation in September, keeping total returns in positive territory. Within EUR investment grade, banks and real estate sectors led the gains. We believe the EUR real estate sector still has further upsides, supported by solid rent growth in both residential and retail segments, combined with a stable interest rate environment - favourable to property valuations.
With the Fed widely expected to cut rates further, while the ECB maintains that it is “in a good place”, some EUR high yields now appear more attractive than U.S. high yield on an FX-hedged basis. Notably, the default rate among EUR BB issuers has remained at zero for the past 14 months.
The Vanguard USD Corporate Bond ETF advanced +0.6%, driven by the decline in Treasury yields—double the prior week’s loss. The iShares Core Euro IG Corporate Bond ETF also gained +0.3%.
In high yield, USD credits slightly outperformed EUR peers, returning +0.3% versus +0.2%, respectively.
Given the favourable rate environment and prudent corporate balance sheet, investing for carry trades remains the dominant investment strategy in the current context.
Government bonds rallied globally last week, driven by soft U.S. labor data and improved risk sentiment in Europe. U.S. Treasuries saw strong demand as the ADP report pointed to private sector job weakness, while official data was delayed due to the shutdown. The 2-year yield fell 7bps to 3.58% and the 10-year declined 6bps to 4.12%, although both reversed slightly on Friday (+3.7bps and +3.6bps respectively). Breakevens narrowed 4bps, while real yields eased modestly.
In Europe, bond markets also advanced. The 10-year Bund yield fell 5bps to 2.70%, with French OATs (-6bps) and Italian BTPs (-7bps) outperforming ahead of key political developments in France. Peripheral yields, including Spain and Portugal, tightened by 8bps.
UK 10-year yields declined 6–8bps, while Swiss and Japanese yields bucked the trend, edging higher.
ETF performance reflected this rally, with longer-duration U.S. Treasuries outperforming — the iShares 20+ Year Treasury ETF gained 0.54%, while European government bond ETFs also posted gains, led by the iShares EUR 10–15 Year ETF (+0.59%).
Emerging market
Emerging Market (EM) sovereign USD bonds have further reasons to stay bullish, supported by the U.S. government shutdown and a weaker dollar. Argentina’s bonds, while volatile, rebounded after U.S. Treasury Secretary Bessent reaffirmed Washington’s backing.
Global market volatility continued to ease, driving credit spreads to their tightest levels since 2007. Within EM, investment-grade sovereigns outperformed high-yield peers on a total return basis.
In the first nine months of 2025, EM sovereigns issued USD 205 billion in Eurobonds, a sharp increase from USD 149 billion over the same period last year. Meanwhile, global EM debt funds recorded 24 consecutive weeks of inflows, reflecting sustained investor appetite.
Performance remained broadly positive across EM asset classes — both hard-currency and local-currency bonds advanced, with the iShares EM Sovereign Bond ETF and J.P. Morgan EM Local Currency Bond ETF each gaining +0.4%. EM corporates and Asian high yield also rose +0.3%.
While valuations no longer provide a wide cushion against slower global growth, EM yields and carry remain attractive, and a weaker USD continues to lend meaningful support to the asset class.
