Following the tariff shock on April 2nd, last week marked a shift from a trade spat to a broader economic confrontation between the U.S. and China. Meanwhile, the U.S. administration offered a 90-day pause on new tariffs for other trade partners, temporarily defusing tensions with Europe and North America. Against this backdrop, uncertainty around global growth and inflation trajectories remained exceptionally high. In the United States, the U.S. dollar and Treasury markets experienced extraordinary volatility, with signs of substantial capital outflows suggesting that global investors may be questioning the safe-haven status of U.S. assets. The sharp rise in long-end Treasury yields and a concurrent slide in the dollar raised concerns that the Greenback’s reserve currency role is increasingly under scrutiny. Several Federal Reserve officials acknowledged this more complex macro backdrop. Comments throughout the week reflected dual concerns: downside risks to growth and upward pressures on inflation stemming from tariffs. Even as March’s CPI and PPI inflation prints came in slightly softer than expected, markets remained focused on what lies ahead. With April ushering in a new tariff regime, the inflation landscape could shift materially in the months to come. As a result, futures markets revised their Fed rate cut expectations downward. Investors now price in only three 25bp cuts by year-end, down from four cuts just a week earlier. The Fed’s balancing act is growing more precarious—too slow on cuts, and growth risks deepen; too fast, and inflation could reaccelerate under tariff pressure. In the Eurozone, the temporary tariff suspension provided limited relief. A 25bp ECB rate cut is still widely expected this week, with two more priced in by year-end. However, recent euro strength and falling energy prices could suppress inflation in the coming months—opening the door to further easing later in the year. In Switzerland, the surge in the Swiss franc against the dollar—approaching levels last seen during the 2011 currency crisis—has led markets to price in a return to negative rates. Futures now reflect a chance of sub-zero SNB policy rates by June, signaling a dovish shift as currency strength threatens the economy. In the UK, stronger-than-expected economic data and upward pressure on long-term yields kept monetary policy expectations stable. Markets continue to anticipate three 25bp rate cuts in 2025, with the first move still forecast for May. As inflation persists and global volatility rises, the BoE may opt to tread cautiously.

Credit markets endured a turbulent week as the sharp surge in U.S. Treasury yields—driven largely by hedge funds rapidly unwinding leveraged Treasury basis trades—triggered widespread dislocations across the funding and credit space. The rate spike effectively froze the U.S. primary corporate bond market for most of the week, limiting issuance to a few names with minimal direct exposure to tariff risks, including Japan Tobacco and Transurban, the Australian toll-road operator. The U.S. administration’s unexpected 90-day pause on reciprocal tariffs helped ease immediate concerns of an escalating trade war, temporarily shifting the narrative from retaliation to renegotiation. But that pause did little to alleviate growing fears around U.S. growth and financial market fragility. In fact, the week was marked by historic fund outflows:

• U.S. high yield (HY) experienced its largest weekly outflow in nearly two decades
• EUR HY outflows approached levels not seen since the pandemic’s peak
• EUR investment grade (IG) saw the biggest weekly outflows since 2020

In performance terms, U.S. IG spreads widened 4bps to 118bps, and the Vanguard USD Corporate Bond ETF fell sharply by -2.1% on the week, pushing its YTD return into negative territory (-1.0% YTD) as Treasury yields surged. EUR IG held up better, despite spreads widening by 6bps to 119bps. The iShares Euro IG ETF was flat on the week (-0.9% YTD), supported by the relative stability in Bund yields. Since April 2nd's "Liberation Day," European bank senior and utilities have been the standout performers in EUR IG. In high yield, U.S. HY spreads surprisingly tightened by 19bps to 426bps, partially retracing the previous week’s widening. The iShares USD HY ETF gained +0.8% on the week (-1.5% YTD). In contrast, EUR HY spreads widened sharply by 33bps to 412bps, though the iShares Euro HY ETF also managed a +0.8% weekly gain (-1.4% YTD) thanks to rate sensitivity. High-beta segments bounced:

• European corporate hybrids fully rebounded, gaining +1.2% (-1.1% YTD)
• WisdomTree AT1 CoCo ETF recovered +0.3% (-2.1% YTD) after a sharp selloff

Looking ahead, credit spreads are likely to remain volatile. The market is increasingly concerned that the U.S. economy is now absorbing multiple simultaneous shocks—a combination of tariff-related supply pressures, weakening demand, and the negative wealth effect from falling equity markets.