Update Bonds: Stability and resilience

US Treasury yields have declined, with the 10-year yield falling to 4.1%. This is a drop of 13 basis points (bps) since the start of September, driven by weaker economic indicators. Following a 25 bps Federal Reserve rate cut in September, market consensus anticipates an additional 50 bps cut. However, our in-house view remains more cautious, expecting no further rate cuts in 2025, due to a likely modest pickup in US inflation. Recent developments include a US federal government shutdown, marking the second shutdown during a Donald Trump presidency. The previous one took place in 2018 during his first term.

In the eurozone, inflation edged higher to 2.2% in September from 2.0% in August, driven by rising energy prices and persistent food and services inflation. However, our economists expect inflation to stabilize near 2% in 2025 in the eurozone, supported by slowing wage growth and energy price stabilization. The European Central Bank (ECB) is maintaining its current monetary policy stance. Notably, the inflation data had no impact on the 10-year Bund yield, which remained stable at around 2.70%.

In the corporate bond market, both European and US investment-grade spreads have exhibited continued resilience. European investment-grade spreads have tightened since the beginning of September, reaching 79 bps relative to the Bund, while US investment-grade spreads narrowed to 74 basis points against US Treasuries. Both markets are now trading significantly below their historical averages, with spreads at some of the lowest levels recorded since the Global Financial Crisis (GFC).

High-yield bonds have similarly benefited from the relatively stable market environment, drawing investors with their attractive yields. In Europe, high-yield spreads have tightened since the beginning of September at 265 basis points, whereas US high-yield spreads have stayed stable at around 270 bps. Like their investment-grade counterparts, both European and US high-yield spreads are near or below their lowest levels since the GFC. The tightening of US and European investment-grade spreads is supported by a combination of accommodative monetary policy, strong fundamentals and robust investor demand.

While corporate all-in yields remain appealing, caution is advised due to the persistent uncertainty surrounding the economic impact of tariffs and trade tensions. Consequently, our preference leans toward higher-quality corporate bonds and securitized bonds, which are anticipated to deliver stronger performance in Europe’s low-growth, uncertain and volatile environment.

Looking ahead, the market's primary focus will be on the resolution of the government shutdown deadlock between Republicans and Democrats and upcoming US employment data, if the shutdown does not prevent its publication.