Global rates begin to diverge

Key takeaways

• Fed leaves borrowing costs unchanged
• Differences emerge across global interest rates
• Improving outlook for emerging market bonds 

At its January meeting, the U.S. Federal Reserve (Fed) voted to pause its rate-cutting cycle, a move that aligns with recent signs of stabilizing labor markets and easing inflation pressures. Markets had generally priced in this outcome, with long-term U.S. Treasury yields staying largely unchanged on the week. Meanwhile, the U.S. yield curve remained steep, reflecting a more anchored outlook for short-term rates alongside continued uncertainty around growth and inflation over the longer term.

Credit markets also remained in focus this week, particularly as companies continue to finance large-scale investments in artificial intelligence (AI). In recent months, several major technology firms have issued substantial amounts of debt using a variety of structures, from traditional investment-grade bonds to asset-backed and hybrid vehicles.

While this surge in issuance initially led to modest spread widening, markets have since absorbed the supply with ease, and spreads have returned to historically tight levels. Strong corporate fundamentals and steady demand for yield continue to support credit markets, even as valuations look increasingly stretched.

Despite tight spreads, we still see opportunities across corporate, securitized, and emerging market credit. In a market that has become more systematized, combining fundamental insight with quantitative tools has proven particularly effective in identifying relative value.

Outside the U.S., divergence across major developed markets is becoming more pronounced. Japan remains a key area to watch, as rising long-term government bond yields raise the possibility that Japanese government bonds could become more attractive relative to U.S. Treasuries. A sustained shift here could have implications for global capital flows.

More broadly, we believe pauses by the Fed, the European Central Bank, and the Bank of Canada—alongside the potential for higher rates in Japan—are creating a richer opportunity set in global rates markets. After a long period defined first by extremely low rates and then by synchronized tightening, dispersion is finally returning.

Our outlook for emerging market debt continues to improve. Several countries have made meaningful progress on fiscal discipline and inflation control, supporting lower borrowing costs and improved investor confidence. Recent bond issuance and favorable inflation data across parts of Latin America highlight this trend, while reforms in countries such as Turkey and South Africa are beginning to gain recognition from markets.

Overall, we believe healthier inflation and growth dynamics across the emerging market universe are strengthening the case for selective exposure within diversified fixed-income portfolios.