Our fixed income team provide their update of recent market events
France is embroiled in political turmoil, with knock-on effects for its sovereign rating and debt. Meanwhile, it’s all eyes on the US labour market and rates. Read on for a breakdown of fixed income news across sectors and regions.
Macro/government bonds
The bias in the US Treasury market was to marginally lower yields last week. The yield on the US 10-year fell by 1bp, while the yield on the German 10-year rose by 5bps. The divergence in directionality between these markets reflects differing stages in the monetary policy cycle.
The US looks set to ease monetary policy in September, amid increasing evidence of a weakening labour market and muted inflationary pressures, while the European Central Bank (ECB) appears to have reached the end of its cutting cycle.
US producer price inflation came in weaker than expected while CPI was in line. There was little in the inflation data to suggest tariffs have meaningfully impacted inflation. With inflation quiescent, markets have focused on jobs weakness. The non-farm payrolls revision on job market growth for the year ending March 2025 showed that the US economy had created 911,000 fewer jobs than previously thought. Initial jobless claims also came in higher than expected. While this revision increased focus on the labour market, the stock market saw the rise in claims as cementing a cut in interest rates. A full quarter point reduction is now fully priced in for September, with a further four additional 25bps cuts by next June.
Last week, the ECB left rates on hold for the second successive time, as expected. At the press conference bank president, Christine Lagarde, said the disinflationary process was by and large over. No further forward guidance was given. With many traders viewing the hold hawkishly, valuations weakened at the front-end of the euro curve, with the yield on the German 2-year rising 9bps.
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We remain constructive on duration and maintain strategic yield curve steepening positions, although we trimmed the size of the steepening positions last week.