Update Bonds: Are bond markets getting less sensitive to politics?
Last week, US President Donald Trump threatened Europe with a 50% tariff hike starting June 1st. In an unexpected twist, after speaking with Ursula von der Leyen, President of the European Commission, Trump delayed the potential tariff increase to 9 July. Despite the uncertainty created by the trade war and sudden tariff announcements, the impact on US Treasuries was minimal.
Meanwhile, Germany’s 10-year Bund yield, considered the European ‘safe haven’, fell by approximately 10 basis points (bps) to 2.53%. In the corporate bond market, European investment-grade spreads showed resilience amidst volatility. They stabilised around 103 bps relative to the Bund, down from nearly 130 bps in April when the tariffs were first announced. The US investment-grade market mirrored this trend, settling at 91 bps against US Treasuries, significantly lower than the 119 bps observed after ‘Liberation Day’. In both instances, spreads remain below historical averages and close to yearly averages.
High-yield bonds have exhibited greater sensitivity to Trump's latest announcements and their inherent economic threats. However, the changes are not fundamentally significant. European high-yield spreads widened slightly to 332 bps, still considerably below the April highs of 434 bps. Similarly, US high-yield spreads rose to 330 bps, which is well below the April highs of 450 bps. Like the investment-grade bonds, these spreads are below historical averages.
While the corporate all-in yield may seem appealing, caution is advised due to the potential impact of the trade war uncertainty. We have a preference for higher-quality corporate bonds and securitized bonds. These are anticipated to perform better given Europe's limited growth expectations in an uncertain and volatile environment.
With the trade war saga continuing to impact markets this week, investors are closely monitoring key US economic indicators. These include the Conference Board’s consumer confidence index for May, the minutes of the latest Federal Reserve monetary policy committee meeting and the PCE price index for April.
Finally, in the weeks ahead, investors will pay attention to the ‘big, beautiful tax bill’, a multi-trillion-dollar tax break package, which is nearing finalisation. This tax bill could influence US economic growth positively in the second half of the year. However, it may also adversely impact federal debt and put upward pressure on long-term US Treasuries.