Chapters
Market background
A combination of sticky inflation, labour-market resilience, and hawkish comments from the US Federal Reserve (Fed) caused a sharp rise in US Treasury yields over April. The US Consumer Price Index (CPI) revealed higher-than-expected inflation (3.5% year on year), while core inflation – which strips out food and energy prices – was higher still at 3.8% over the same period. Responding to this, Fed Chair Jerome Powell was notably more hawkish in his statements. Powell reiterated that recent economic data suggests it is likely to take longer than expected to bring inflation down to target, and that the Fed can keep interest rates at their current elevated levels for longer if needed. This led to a repricing in the US Treasury yield curve and a reset in the market’s expectations of interest rate cuts. In Europe, sovereign bond yields across the continent rose over the month, although not as significantly as in the US. The European bond market sell-off was partly driven by the correlation with the US, but also a result of market participants removing rate cuts from their 2024 expectations.
April was a difficult month for emerging market (EM) sovereign debt, with the broader asset class coming under pressure from the sell-off in sovereign bond yields across developed markets. Starting with local bonds and currencies, the JP Morgan Government Bond Index-Emerging Markets fell by 2.1% over April, with both EMFX (-1.2%) and hedged local bonds (-1.0%) weakening, with the former impacted by the stronger US dollar. In hard currency debt, the sovereign index (JP Morgan EM Bond Index) also fell by 2.1%, with the more interest rate-sensitive investment-grade portion of the index falling by 2.8%, while the high-yield segment fell by 1.4%.
