Central banks drive markets as issuance records fall
The observance of Independence Day in the US on Friday shortens the trading week. It was a week dominated by central bank communication, record bond issuance and Thursday’s US jobs report. The key theme remains the repricing of global rate expectations, particularly in the US, where investors are increasingly factoring in further Federal Reserve tightening under new Fed Chair Kevin Warsh.
US Treasury markets experienced a modest bear steepening. Following a positive June for Treasuries, month-end positioning pushed long-end yields higher, with ten-year Treasuries rising towards 4.50% and the 30-year Treasuries approaching 5.00%. Trading activity was elevated, highlighting continued investor sensitivity to duration risk and changing policy expectations.
At the European Central Bank’s (ECB) Sintra conference, policymakers adopted a more cautious tone following June's rate hike. Several Governing Council members highlighted easing energy pressures and improving geopolitical conditions, arguing there is little urgency for another move in July.
June Eurozone inflation came in at 2.8% year-on-year, below expectations, strengthening the case for a pause and supporting European government bonds. Markets have subsequently pushed expectations for the next full ECB hike well into 2027.
The Bank of Japan remains an increasingly important driver of global bond markets. Following June's rate increase to 1.0%, the highest level since 1995, expectations for another hike have moved forward, with markets increasingly looking toward October.
Japanese bond markets reflected the tension. Short-dated auctions attracted strong demand, while longer-dated bonds faced weaker investor appetite, pushing yields higher. At the same time, foreign investors recorded the largest monthly sale of Japanese government bonds since early 2023. This underscores growing concerns about rising Japanese yields and shifting monetary policy.
The first half of 2026 closed with record issuance across global credit markets. US investment-grade issuance matched the highs reached during 2020. July is expected to remain exceptionally active, supported by M&A financing needs. Japanese and emerging-market issuers also achieved record funding volumes.
Credit markets, however, are beginning to show signs of divergence. European investment-grade spreads remain stable, supported by strong demand, while European high-yield spreads widened, and US high-yield default rates rose to their highest level since early 2024.
The broad picture remains one of divergence. Government bond markets are adjusting to the prospect of further tightening, particularly in the US and Japan, while credit markets continue to benefit from strong technical support and robust issuance activity.
We remain constructive on the intermediate part of the yield curve, particularly the five-year sector, where valuations appear most attractive relative to policy uncertainty and long-end duration risk.
At the same time, tighter spreads, rising defaults and increased dispersion within high yield reinforce the need for greater selectivity. Looking ahead, US economic data and evolving Federal Reserve expectations are likely to remain the primary drivers of global fixed-income markets.