The Federal Reserve left rates unchanged at 3.50–3.75%. While the policy statement was unchanged compared to the June’s statement, three FOMC members dissented in favour of a 25bp hike, highlighting growing concern over persistent inflation. Chair Kevin Warsh described the decision as one of “watchful thinking”, rather than “watchful waiting”, stressing the Committee’s unwavering commitment to its 2% inflation target and arguing that higher Treasury yields have already tightened financial conditions. While the overall tone was slightly more firm on inflation risks than in June, this FOMC meeting was perceived as less hawkish than feared or expected, as Kevin Warsh didn’t himself vote for a hike, and didn’t shed more light on the reaction function of the Fed and what to expect in the coming months depending on the evolution of macroeconomic data. As a result, market expectations for rate hikes fell following the Fed’s meeting: future markets still price at least one 25bp rate hike by the end of the year, but the probability of seeing two hikes declined from 80% to 40%.

The Bank of England also kept Bank Rate unchanged last week (at 3.75%), although the split widened to 6-3 in favour of holding rates. Policymakers judged underlying disinflation to be continuing, but warned renewed Middle East tensions could reignite inflation through higher energy prices. Following the meeting, rate hike expectations declined. Future rate markets continue to expect at least one 25bp rate hike by the end of the year, but now price only a 20% chance of two 25bp hikes (vs 70% before the BoE meeting).

The Bank of Japan left rates at 1% in an 8-1 vote, signalling that further tightening remains likely as underlying inflation approaches target despite moderating price risks. As a result, rate hike expectations rose, with future markets now assigning a 25% probability for two 25bp hikes by the end of 2026. 

Credit

Brent crude fell on Monday and core government bond yields declined after President Trump said fresh U.S.-Iran talks would begin, easing immediate geopolitical concerns. Nevertheless, market volatility remains elevated.

Corporate credit spreads were remarkably resilient notably in investment grade (IG) last week. U.S. IG delivered negative total returns, entirely driven by higher U.S. Treasury yields, even as spreads tightened modestly. By contrast, U.S. HY and Euro HY spreads widened slightly amid softer macroeconomic data.

U.S. HY and Euro HY widened modestly amid softer macroeconomic data.

During July, corporate credit yields continued to rise as U.S. Treasury and German Bund yield curves steepened. U.S. IG yields now stand at 5.4%, 63 basis points (bp) higher year-to-date, leaving total returns in negative territory. Excess returns, however, remain positive at +63 bp, underscoring resilient corporate fundamentals. In U.S. HY, lower-quality issuers underperformed, with CCC spreads widening significantly year-to-date.

Fund flows remained supportive, with continued inflows into Euro IG and Euro HY. Strong second-quarter revenue growth from Microsoft, Meta and Alphabet was overshadowed by higher AI capex guidance, weighing on U.S. IG technology. Primary market demand also softened, with July oversubscription falling to 3.6 times from 3.9 times year-to-date.

For the first time ever, the Euro IG market is projected to pay €100 billion in coupon payments over the next 12 months, a very supportive technical.

Looking ahead, resilient fundamentals and elevated all-in yields should continue to support excess returns, although persistent rate volatility is likely to remain a headwind for total returns.