Jerome Powell has finally yielded: a quarter-point cut in the Fed funds rate, coupled with the promise of more to come. After two years of hawkish inflation-fighting, the Fed has pivoted—now positioning itself as a dove, focused on a labor market that's already losing momentum. Trump is jubilant. He never fully accepted Powell’s defiance, and now it appears the Fed is moving in lockstep with the White House’s demands. The real issue? After so vigorously defending the Fed's independence, Powell must now explain why monetary policy is easing precisely as political pressure mounts—hard to pass that off as mere coincidence. Markets, of course, aren’t looking for explanations. They welcome rate cuts, regardless of whether inflation has truly been tamed. The message is clear: employment risk now outweighs inflation risk. That said, beyond the potential for political bargaining between the Fed and the administration—or the inconsistency of an institution meant to offer long-term guidance—there’s something to be said about the agility both are demonstrating. Their capacity to pivot and redefine priorities highlights, once again, the structural and institutional lag plaguing the Eurozone: caught between imported inflation, anemic growth, and persistent regulatory inertia.

 

Unsurprisingly, the more the Fed signals dovishness, the more the dollar weakens. And it’s not just Powell—Trump’s administration openly favors a weaker greenback to boost competitiveness. The result? The DXY index is flirting with four-year lows. Foreign investors are scrambling to hedge their dollar exposure. For the first time in over a decade, inflows into currency-hedged ETFs have overtaken unhedged ones. The message here is equally clear: investors still want US assets, but not at the cost of a weakening dollar. The scale of hedging is significant—even at a 2% cost over three months for European investors. That’s enough to dent the appeal of Treasuries, unless you're comparing them to top-tier European credit like Eurobonds or German Bunds (but certainly not Italian, Greek, or French debt). Yet these costly hedges serve two purposes: they allow investors to retain exposure to the global “flight-to-quality” benchmark—US Treasuries—in turbulent times, and to maintain positions in the world’s most valuable and resilient companies.

Ironically, the more hedging occurs, the more pressure it puts on the dollar—and the more necessary hedging becomes.

 

Meanwhile, European credit markets appear surprisingly healthy. Investment Grade and High Yield spreads are tight, investor demand is strong, and order books are overflowing. But the High Yield market has changed. During the low (or negative) rate era, investors eagerly funded highly leveraged issuers like Altice and Rallye to pick up a few extra basis points. The post-hike environment has inflicted three major blows on this segment: a drop in demand, a deterioration in credit quality and liquidity, and an outright collapse in the lowest-rated corners of the market. Now, ratings seem to carry more weight than fundamentals. Risky, cyclical issuers rated B or BB are issuing record-sized bonds at just 5–6% yields. Anything rated CCC, however, is virtually unmarketable. Which raises a broader question: isn’t a well-identified and well-compensated risk preferable to a latent one? Particularly as Europe’s growth slows and the risk of widespread downgrades increases. And yet, this is exactly where investors are choosing to pile in.

 

On the topic of ratings—and rating-based bond purchases—this week brought a quiet but revealing move by the ECB. As reported by the Financial Times, the central bank has sold off its Worldline bonds following their downgrade to High Yield. There was no official requirement to do so: the ECB held onto Atos bonds well after their downgrade, as well as others like Steinhoff. So why sell now?

Three overlapping explanations come to mind:

1.           In the context of balance sheet reduction, the ECB is finally in a position to sell selectively—unlike during the peak of its bond-buying phase.

2.           After the protracted and politically sensitive Atos saga, the ECB may have decided that dealing with Worldline simply wasn’t worth the risk.

3.           Finally, having been criticized for poor credit selection in the past, the ECB may be making a quiet shift toward greater selectivity—offloading "lame ducks" discreetly, even if the FT wasn’t asleep at the wheel.

 

Four different developments, one common theme: central institutions navigating between proclaimed independence and real-world pressures.

•             The Fed shifts its stance under political scrutiny.

•             The dollar becomes a deliberate tool of economic strategy.

•             European credit markets, despite the façade of selectivity, return to familiar excesses.

•             The ECB quietly redefines its credit approach, but offers no transparency.

In this environment—and with neither yields nor credit hierarchies undergoing fundamental shifts—we see no compelling reason to revise our bond portfolio allocations. We continue to favor moderate credit risk. Our High Yield allocation is at its lowest since the end of 2019. We maintain a duration shorter than benchmark indexes and will increase it gradually as European long-term rates rise—slowly, but surely.

Matthieu Bailly