Global rates begin to diverge

Transcript

Hi and welcome to Russell's market weekend review for Friday, Jan 30th, 2026. I'm Rudy Samanta, global co-head of fixed income at Russell Investments. It's been a busy week cleaning snow on the East Coast, but in some good news looking ahead, we've got a true coast to coast matchup coming up, the Seahawks versus the Patriots. And while most of Russell Investments will be cheering for our hometown team, I'll have to admit I'm excited to have the Pats back in the Super Bowl discussion. Now turning to markets. Looking back over the prior week, four major themes stood out. At the January 28th meeting, the Fed paused its rate wring rate cutting cycle with a 10 to2 vote. This outcome aligned with the more stable labor market and cooler inflation trends that our chief strategist Paul Adelman had highlighted last week. The 30-year Treasury held steady at 4.8% suggesting markets had largely priced in the pause. More broadly, the yield curve remains steep with the 2's 30 slope at 130 basis points with the short end now more firmly anchored and the long end reflecting policy risk and ongoing evolution and uncertainty in labor markets growth and inflation outcomes. Now moving on to credit markets, a key dynamic that we're watching is the scale and structure of AI related capex financing. In Q4, four major hyperscalers collectively issued close to a trillion dollars in debt using a mix of traditional investment grade bonds, special purpose vehicles, hybrid structures, and assetbacked financing. While investment rate spreads briefly widened into the mid80s as investors evaluated this novel issuance, they quickly retraced back to around 70 basis points near historically tight levels. Given the Fed's pause, we may see additional AI related IG issuance from companies eager to secure funding before financing conditions potentially tighten. As an early signal, Meta beat quarterly revenue expectations yesterday and raised its AI capex outlook to 135 billion, above the consensus analyst estimates of around 110 billion. Despite extremely tight spreads, we continue to invest and find opportunity across all sectors of corporate, securitized, and emerging market credit. Credit markets have increasingly become systematized both in trading and in alpha generation, and using combinations of investment styles that can be both fundamental and quantitative in nature has been especially useful in this environment. Moving to global markets, Paul also noted Japan's evolving fiscal position and the rise in JGB long rates. This raises the potential reversal of the long-standing negative carry between Japanese and US yields. If this trend continues, inflows into JGBs could be accompanied by outflows from US treasuries, which we are monitoring closely. Overall though, we view this more broadly through the context of opportunity and some divergence across major developed market rates. As we noted, pauses from the Fed and earlier from the ECB, combined with pauses from Bank of Canada recently and potentially rising trend in the Bank of Japan, you can start to see relative value opportunities in rates markets. Pair this with variations in steepening, flattening, and potential inflation and growth outcomes. And we and our managers in the global rate space are now able to find more consistent relative value trades from a long tenure of very low and then very consistently rising rate environment. And last, but certainly not least, our view on emerging markets continues to improve as several countries have shown meaningful progress on debt consolidation, disciplined central bank action, and well-managed inflation through 2025. Turkey, for example, saw continued declines in borrowing costs through the entire year last year. And South Africa received their first ratings upgrade in two decades, moving from a doubleB minus to a double B in foreign currency bonds. And turning to Latin American markets, this trend is continuing into 2026. New data from Chile shows inflation coming in lower than December projections, helped both by peso appreciation and softer core goods inflation, supporting the likelihood of a rate cut by the Chilean Central Bank in March. Similarly, Ecuador issued $4 billion bonds on Monday with strong subscription demand and encouraging signal after prolonged engagement with IMF stabilization programs. Their successful re-entry into global debt markets creates a positive read through for countries like Argentina and Brazil who may soon follow. Overall, when we look across larger countries like Turkey, South Africa and the entire Latin American complex, the broad EM complex is showing healthier inflation and growth dynamics which we will continue to monitor as we manage the continued exposure to emerging market credit risk in our broad fixed income portfolios. With that, thank you and please join us for insights from my colleagues next week and the following week, including hopefully over that time a new Super Bowl champion for 2026. Hi, I'm Sophie Antal, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

Key takeaways

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

Federal Reserve stays on hold

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 absorb AI-driven issuance

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.

Central bank policy paths diverge

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.

Emerging market fundamentals strengthen

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.

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