• Bond yields broadly fell in January despite strong supply and uncertainty around US tariff policy outcomes.

• Developed market government bond yields declined with the exception of Europe, with US 2- and 10-year yields moving lower by 4 bps and 3 bps, respectively. 

• Investment-grade credit spreads tightened over the month. 

Fixed income markets in January were characterised by falling yields, despite rising uncertainty around US tariff policy outcomes. Robust bond issuance was largely in line with expected seasonal trends. However, demand more than absorbed the strong supply, with some new issues being as much as 15x oversubscribed. 

In the US, stronger-than-expected labour market data put upward pressure on Treasury yields early in January. However, longer-term data still pointed to some softening in the labour market, indicating a trend towards normalisation, and Treasury yields fell in the latter half of the month. 

The UK government bond market saw some volatility, driven by a general increase in global yields as well as concerns around UK debt sustainability, causing 10-year gilt yields to rise to their highest levels since 2008, and the pound to depreciate. However, this was short-lived, and yields recovered by month end. 

Inflation in developed markets remained above major central banks’ target in both December and January. In the US, headline inflation rose marginally to 2.9%, while core inflation, which excludes volatile items like food and energy, fell to 3.2%. In the UK, headline inflation fell slightly to 2.5%, while core inflation fell by more than expected to 3.2%. In the euro area, headline inflation unexpectedly rose in January to 2.5%, while core inflation remained steady at 2.7%. 

At its January meeting, the European Central Bank (ECB) cut interest rates by a further 25 basis points (bps) to 2.75%, its lowest level since early 2023 and the fifth cut since last summer. Meanwhile, the US Federal Reserve kept rates unchanged at 4.25%-4.50%, giving little signal that it plans to lower rates in the near term while taking note of elevated inflation and a strong jobs report. The Bank of Japan raised its policy rate by 25 bps in January. 

Monthly performance by market

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Source: Bloomberg, for the period 31 December 2024 to 31 January 2025. Bloomberg indices are used as proxies for each exposure¹.

Government bonds

Government bond yields broadly fell in January, with the exception of Europe. In the US, 2- and 10-year yields fell by 4 bps and 3 bps, respectively. In the euro area, German 2-year yields rose by 4 bps and 10-year yields rose by 10 bps, while in the UK, 2- and 10-year yields fell by 18 bps and 3 bps, respectively².

Credit markets

Investment-grade (IG) spreads broadly tightened over the month. Spreads in US dollar, euro- and sterling-denominated IG tightened by 1 bp, 11 bps and 5 bps, respectively³. In emerging markets (EM), EM IG and EM high-yield (HY) bonds tightened by 12 bps and 20 bps, respectively⁴. 

Monthly change in credit spreads

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Source: Bloomberg. For the period 31 December 2024 to 31 January 2025. Index proxies are used for each exposure⁵.

Q4 corporate earnings 

Q4 corporate earnings Fourth-quarter corporate earnings season has kicked off. Analyst expectations for European companies are for moderate growth in sales and earnings, with firms in the STOXX600 index forecast to post average annual revenue growth of 1.8% and average annual earnings growth of 1.1% versus the previous year⁶). We will be closely watching company earnings commentaries for signals of what could drive or dampen future growth, including: a recovery in demand from China, firms’ appetite for M&A, updates on cost-cutting and efficiency plans, trends in underlying costs and sector and company sensitivity to potential tariffs.

Our base case remains that, over the coming quarters, revenue and earnings growth will pick up as the global rate-cutting cycle aids consumer confidence and stimulates economic activity, albeit under more moderate macroeconomic expectations, so that the recovery will likely be slower than previously expected. Geopolitical tensions and potential tariffs and trade wars under the new US administration pose downside risks to a 2025 earnings recovery scenario. Away from earnings, we remain of the view that overall, IG company fundamentals are in good shape.In terms of the technical backdrop, the outlook remains positive. Last year was one of the strongest years for IG-credit with steady inflows into the sector. With the ECB now set on an accelerated cutting path and yields still at attractive levels (the euro-denominated IG credit premium is currently around 0.75% versus the 10-year bund yield), we expect demand for credit to remain strong. 

Emerging markets

In January, EM credit returned 1.4%⁷, which was composed of Treasury returns of 0.6% and EM spread returns of 0.8%, after EM credit spreads compressed by 9 bps during the month⁸.  EM HY (+2.1%) significantly outperformed EM IG (+0.7%)⁹. A softer-than-expected US inflation print assuaged fears of the need for tighter monetary policy, triggering a reprieve in Treasuries and catalysing a rally in risky assets.  

EM credit spreads 

Source: Bloomberg and Vanguard. For the 24 months to 31 January 2025. Proxies used: EM investment-grade: Bloomberg EM USD Aggregate Average OAS Index; EM high-yield: Bloomberg Emerging Markets High Yield Average OAS Index.

Outlook

Market focus is likely to remain on diverging monetary policy narratives between major developed market economies, as well as geopolitical volatility, notably in the US, Germany and France. The rate-cutting cycle by major central banks that began last year should continue, in our view, although there has been a significant repricing in rate-cut expectations for 2025, particularly in the US. We believe yields remain attractive and supportive for returns under most market environments.

In credit, spreads are consistent with a soft-landing narrative. Despite growth in Europe being lacklustre, we expect companies to remain resilient as fundamentals are starting from a strong base and many issuers have been deleveraging over the last couple of years. 

Technicals remain strong, with robust demand for IG funds continuing from 2024 into the new year. The steepening of the yield curve should further support inflows from money market funds into longer-dated bond strategies. In terms of 2025 supply, we expect higher levels of gross new issuance versus 2024, with net issuance coming in at a similar level to that of 2024, due to a wave of bond maturities this year.

Global credit is currently yielding more than cash, and is likely to outperform cash in markets where further rate cuts get priced in. We are constructive on EM fixed income as fundamentals are strong and yields are attractive. Nevertheless, valuations are at historically tight levels and economic uncertainty remains a risk. 

¹ Source: Bloomberg and Vanguard, based on the Bloomberg Global Aggregate Credit Index, for the period 31 December 2024 to 31 January 2025. 

² Source: Bloomberg and Vanguard, for the period 31 December 2024 to 31 January 2025.

³ Source: Bloomberg and Vanguard, based on the Bloomberg Global Aggregate Credit Index, for the period 31 December 2024 to 31 January 2025. 

⁴ Source: Bloomberg and Vanguard, based on the Bloomberg EM USD Aggregate Average OAS Index and Bloomberg Emerging Markets High Yield Average OAS Index, for the period 31 December 2024 to 31 January 2025.

⁵ Source: Bloomberg indices: Global Aggregate Credit Average OAS Index, Global Aggregate Supranational Index, US Aggregate Corporate Average OAS Index, Euro Aggregate Corporate Average OAS Index, Sterling Aggregate Corporate Average OAS Index, US Aggregate ABS Average OAS Index, US Aggregate CMBS Average OAS Index, Global High Yield Average OAS Index, JP Morgan EMBI Global Diversified IG Sovereign Spread Index, JP Morgan EMBI Global Diversified HY Sovereign Spread Index. Data for the period 31 December 2024 to 31 January 2025.

⁶ Source: Lipper and LSEG Data & Analytics. The STOXX600 index is comprised of 600 European companies. Growth data are based on the 12-month period from January 2024 to 31 December 2024 versus the previous year.  

⁷ Source: Vanguard and JP Morgan, based on the JP Morgan Emerging Market Bond Index (EMBI) Global Diversified, for the period 31 December 2024 to 31 January 2025.

⁸ Source: Vanguard and JP Morgan, based on the JP Morgan Emerging Market Bond Index (EMBI) Global Diversified relative to US Treasuries, for the period 31 December 2024 to 31 January 2025. 

⁹ Source: Bloomberg and Vanguard, based on the Bloomberg Emerging Markets USD Aggregate Average Option Adjusted Spread (OAS) Index and Bloomberg Emerging Markets High Yield Average OAS Index, for the period 31 December 2024 to 31 January 2025.