The independence of the US Federal Reserve has come under renewed scrutiny following the Trump administration’s attempt to remove Governor Lisa Cook, a move temporarily blocked by a federal court. While the Fed is legally shielded from political interference, the episode underscores rising pressure on the central bank to align policy with the White House’s agenda, particularly regarding interest rate cuts. Markets remain sensitive to the risk of politicised monetary policy, with investors demanding higher compensation on long-term Treasuries amid uncertainty over the Fed’s credibility.

Bond yields across major markets were mixed in August. The 10-year US Treasury yield fell by 15 basis points (bps) to 4.23%. In Europe, 10-year yields moved higher: Germany by 2bps to 2.72%, the UK by 15bps to 4.72%, and France by 16bps to 3.51%.

In the US, PCE is tracking ~2.9–3.0%, down from 3.5% last year, reflecting sticky but stable inflation pressures above the Fed’s 2% target. Services inflation (healthcare and  shelter) remains persistent, with shelter inflation up 3.9% YoY. Tariffs on autos, pharma, and consumer goods pose modest upside risks. While slowing, consumption remains a key driver with resilient services spending offset by weaker goods demand amid higher rates and softening labour momentum. Business investment is uneven, with AI-related capex providing targeted support while more broader capex slows.

Technical factors such as elevated supply, lack of foreign absorption and lack of any QE/Fed backstop led to the term premium continuing to rise and this may not be fully compensating for inflation/fiscal uncertainty. The US deficit remains ~7–7.5% of GDP, with net Treasury issuance projected above $3.4T in 2025, sustaining a structural supply overhang. Elevated coupons, continued QT, and persistent issuance pressures maintain upward pressure on term premiums and long-end yields.

US EBITDA margins rose further to 32.0%, marking a four-year high, while 72% of investment grade issuers posted YoY EBITDA gains in Q1 2025. Aggregate revenues rose 2.9% YoY, a slight uptick vs Q4 2024. Q2 topline growth may slow modestly as revisions trend lower, while margin guidance remains resilient despite macro crosswinds. Limited near-term refinancing risk remains, with <7% of IG debt maturing in 2025 and 75% of the universe clear until 2026+.

On a net basis investment grade (IG) supply is down ~20% YoY, driven by elevated maturities, robust coupon payments, and cautious refinancing at elevated yields. Issuer discipline and the upcoming net negative supply environment in H2 2025 provide technical tailwinds. High yield revenue grew ~1.8% YoY in Q1/25, moderating from 2.6% in Q4 2024, while EBITDA rose ~2.9% excluding energy.

Sectors tied to domestic services and non-cyclicals continue to outperform, while discretionary sectors soften. ~61% of issuers beat EBITDA expectations in Q1, reflecting softening breadth. Interest coverage declined to ~3.8x, the lowest since Q2/2021, reflecting higher funding costs and softer EBITDA growth. High yield (HY) ETFs recorded ~$10B in net inflows YTD, a slower pace than Q4 2024, but consistent with steady institutional and retail demand for yield. Inflows remain focused on BB and higher-quality B credits, reflecting cautious positioning within HY allocations.