Update Bonds: Volatility remains

This week's key events included a speech by Federal Reserve Chair Jerome Powell and the European Central Bank (ECB) Governing Council meeting. Powell cautioned that the central bank may face challenges in managing rising inflation with a slowing economy that is due to President Donald Trump's tariffs. Powell noted that, for now, the Federal Reserve is positioned to pause in its rate cuts and to seek greater clarity on how government policy changes in areas such as immigration, taxation, regulation and tariffs will impact the economy. A looming economic slowdown and Powell’s wait-and-see approach had limited impact on the US Treasury markets after the short lived spike earlier this month, with US ten-year Treasury yields hovering around 4.30%.

In Europe, the outcome of Thursday’s ECB Governing Council meeting was considered as uncertain until recently, since hawkish members had strongly opposed another rate cut. However, the situation shifted rapidly when inflation unexpectedly fell to 2.2% annually, nearing the ECB’s target level. The disinflationary trend was supported by a notable drop in energy prices and the euro's strong appreciation, reaching its highest level since 2022. In the light of these numbers, the ECB cut reference rates by 25 basis points (bps), resulting in a slight drop (-5 bps) in ten-year Bund yields to around 2.47%.

In the highly volatile market shaped by the trade war, European investment-grade spreads slightly widened at the beginning of April before stabilizing lower at 116 basis points versus Bunds, following the 90-day pause announced by Trump. The US investment-grade market mirrored the European trend, settling at 111 basis points versus US Treasuries. In both cases, spreads remain well below historical average levels.

In the high-yield bond sector, we observed similar trends to those in the investment-grade market, but with greater magnitude, as risky assets are more exposed to the threat of economic deterioration. European high-yield spreads have risen to 386 basis points, approximately 60 basis points higher than before the tariff announcements began, while US high-yield spreads are at 412 basis points, about 75 basis points higher than before the tariff announcements. Nevertheless, spreads remain well below historical averages. While these spreads may appear attractive, caution is advised due to the potential impact of trade war uncertainty. Our focus remains on higher-quality bonds, which are expected to perform better, given the limited growth expectations in Europe.