Government Bonds

“Liberation Day” has landed, and not with a whimper. In extraordinary scenes in the Rose Garden of the White House, President Trump held up a board outlining the level of tariffs the US will impose on countries around the world, and in most cases they were worse than worst-case expectations.

If we look at the main drivers of returns in Q1 2025, the first one that comes to mind is tariffs. But while this is true for equities and credit spreads, in the context of global fixed income the main driver of total returns in Q1 was the Bund sell-off triggered by a momentous shift in German fiscal policy.

With the recent economic spotlight dominated by President Trump’s rhetoric and Germany’s blockbuster fiscal expansion plans, Wednesday brought the UK back into focus with the latest round of inflation data and the Spring Statement from the Chancellor, Rachel Reeves.

Volatility in Bunds seems to have calmed down slightly in the last few days as markets continue to digest huge fiscal expansion plans from Germany and the European Union. At the same time, many forecasters have been downgrading their US growth projections after reassessing the level of pain President Trump seems willing to inflict on the US economy in order to implement his policy agenda.

Last week, risky assets continued to experience a somewhat volatile period. The tone was generally a risk off one, with correlations between risk free and risky assets back to negative.

In a week when US core consumer price inflation unexpectedly rose to 0.4% month-on-month and Federal Reserve (Fed) chair Jerome Powell told Congress the central bank was in “no hurry” to cut interest rates, many market participants have been surprised by the relatively muted reaction in US Treasuries (USTs).

There is little disagreement among investors and economists that the last few years have been highly unusual in many respects. An inflationary shock in developed markets, one of the fastest rate hiking cycles on record, the worst year in decades for government bonds (2022), and mild recessions with no movement in unemployment are just a few of the dynamics that have strayed from recent norms.

With 2023’s rally halted by the Fed’s hawkish messaging, Felipe Villarroel questions whether markets read the recent jobs data correctly and looks at what it means for terminal rate expectations.

A member of our Multi-Sector Bond discusses market conditions in Q4 2022.

Recent employment data suggests the US economy may escape with a soft landing, a welcome boost to market sentiment in the early days of 2023, says Eoin Walsh.

George Curtis looks at market conditions in the third quarter of 2022.

With reaction to the UK’s mini-budget roiling markets for a second day, Felipe Villarroel looks at what higher rates and a weaker currency mean for the UK economy.