Update Bonds: Wait and see mode…
Over the past few days, markets have demonstrated resilience, buoyed by the constructive conclusion of the Russia-Ukraine summit, which avoided any escalation in tensions, and building on the positive market start to August. However, investors are now turning their attention to the Federal Reserve’s Jackson Hole meeting, where Federal Reserve Chair Jerome Powell is expected to unveil a new policy framework.
The market consensus is currently pricing-in a 25-basis-point rate cut in September, with the possibility of an additional cut by year-end. Powell’s remarks will likely play a pivotal role in shaping expectations for interest rate trajectories and overall risk sentiment. This comes against a backdrop of mixed economic data and rising inflation concerns, adding further complexity to the market outlook.
In August, 10-year US Treasury yields have edged lower to 4.29%, down from 4.37% earlier in the month, but they continue to show no clear directional trend amid conflicting signals, such as slowing job growth versus a rising Producer Price Index. By contrast, the 10-year German Bund yield has remained stable at 2.73%, in a context of a clearer European inflation outlook and less volatility in rate expectations.
In the corporate bond market, both European and US investment-grade spreads have demonstrated ongoing resilience. European investment-grade spreads have remained stable month-to-date at 75 basis points relative to the Bund. This is a significant improvement from the 130 basis points seen in April after Donald Trump’s initial tariff announcements. Similarly, US investment-grade spreads have stabilized at 80 basis points relative to US Treasuries, down from 119 basis points in April. Both markets are now trading close to or below their historical averages, with spreads at some of the lowest levels on record.
High-yield bonds have also benefited from the seemingly stable environment, attracting investors with relatively attractive yields. In Europe, high-yield spreads have remained stable month-to-date at 270 basis points, a marked improvement from the April highs of 434 basis points. Similarly, US high-yield spreads have stabilized at 285 basis points, significantly below the highs of 450 basis points in April. Like their investment-grade counterparts, both European and US high-yield spreads remain below their historical averages.
Despite the appeal of corporate all-in yields, caution is warranted due to the lingering uncertainty surrounding the impact of tariffs on economic activity. As a result, our preference remains skewed toward higher-quality corporate bonds and securitized bonds, which are expected to perform better in Europe’s low-growth, uncertain and volatile environment.
Looking ahead, the Jackson Hole Economic Policy Symposium, from August 21–23, will be a key focal point for markets. This annual gathering of central bankers and policymakers provides critical insights into the direction of global monetary policy. Investors will be closely watching Federal Reserve Chair Jerome Powell’s remarks for guidance on the future path of interest rates and policy priorities, as these could have some implications for yield curves and overall risk sentiment.