Update Bonds: Resilience amid delayed tariffs
This week, two major developments have emerged in bond markets. First, US President Donald Trump postponed reciprocal tariffs on Europe and other countries from 9 July to 1 August. This move was welcomed by investors, as it may ease global trade tensions. Second, the minutes from the Federal Reserve's June policymaker meeting, released on 9 July, suggests some officials expect rate cuts by year-end. ABN AMRO, however, does not expect this.
Turning to the impact on US Treasury bonds, last week saw slight fluctuations. Initially, yields rose due to robust employment data and the enactment of Trump's a multi-trillion-dollar tax-break and budget bill. Yields on ten-year US Treasuries, however, decreased by 7 basis points (bps) to 4.33%, following the tariff postponement and limited influence of the Federal Reserve minutes, placing the Treasury yield slightly below the six-month average.
Conversely, the yield on ten-year German Bunds has been rising since mid-June, increasing by approximately 17 bps to 2.67%, its highest level since 23 May, due to eased trade tensions with the US. (When bond yields rise, bond prices fall.)
In the corporate market, European investment-grade spreads have been resilient, reaching their lowest level since 2021 at 84 bps relative to the Bund, down from 130 bps in April at the time of the tariff announcements. The US investment-grade market followed a similar trend, settling at 81 bps against US Treasuries, significantly lower than 119 bps in April. Both are below historical averages.
High-yield bonds have mirrored this positive trend, attracting investors with relatively interesting yields. European high-yield spreads tightened to 292 bps, below April highs of 434 bps. Similarly, US high-yield spreads stabilized at around 280 bps, still well below April highs of 450 bps, and all below historical averages.
As the ongoing trade tensions continue to impact markets, investors will be closely monitoring key US economic indicators, including jobless claims and inflation data, as well as European inflation data. In the weeks to follow, attention will focus on Federal Reserve and European Central Bank meetings in July to better understand future rate-cut expectations. In this uncertain environment, we advocate a cautious approach to credit risk.