In the month of December, there was a secular shift in interest rate expectations marked by a bull steepening in many global yield curves, whereby short-term interest rates declined while long-term rates climbed. This reflected several cross-currents, including the US Federal Reserve continuing to ease its policy rate lower, combined with investor anxiety about deteriorating budget deficits, ever-growing government bond issuance, and the spectre of inflation rates not mean-reverting sustainably to central bank targets, amongst other things.
Benchmark 10-year government bond yields moved higher across most major markets. Japanese yields rose by 25bps, Australian yields by 23bps, German Bunds by 17bps, French OATs by 16bps, and US Treasuries by 15bps. UK Gilts were the notable outperformer, rising by just 4bps over the month.
U.S. equity markets were broadly flat in December, masking meaningful sector rotation beneath the surface. Financials and materials outperformed, while technology lagged. European equities outperformed the US, rising 2.25% over the month, led by financials, with the European Banks index up more than 8%.
Credit markets remained constructive, although the prospect of heavy January supply – seasonally the busiest month of the year – limited the scope for strong performance. Both US and European investment-grade credit spreads tightened modestly by around 3bps, ending the month at 77bps and 78bps respectively.
December USD IG issuance slowed sharply from November to $38bn (YTD $1.69trn), with muted supply across both financials and corporates. The fund selectively participated in attractively priced transactions, notably ANZ’s 3-year FRN and multiple tranches of Merck’s $7.25bn multi-tranche deal. These transactions saw strong demand (approximately 5–7x covered) and post-pricing spread tightening, alongside participation in S&P Global’s 5-year tranche.
In EUR investment-grade credit, supply rebounded to €17.5bn (approximately €9.5bn financials), compared with no issuance in December 2024. Despite seasonally light conditions, demand remained healthy, with deals averaging a 2.6x subscription rate. The standout transaction was Goldman Sachs’ dual-tranche HoldCo deal, which was well received following a long absence from the EUR market, complemented by solid demand for issues from BFCM and Deutsche Bank.
