February 2025 Commentary
Market Overview
In February, fears of rising protectionist policies in the U.S. intensified as the implementation of tariffs became imminent. The 25% tariffs levied on Mexico and Canada—which were delayed by one month—came into effect on March 4 and are expected to impact all three economies. In response, Canada already announced retaliatory tariffs, with Mexico expected to follow suit. The latest Atlanta Fed GDPNow estimate for Q1 2025 came in at -2.8%, a complete flip from the initial estimate of 2.9% at the end of January 2025. One of the reasons that may explain the lowering of the U.S. GDP estimate was the March 3 release from the ISM Manufacturing Index, which dropped to 50.3% in February (0.6% lower than January), citing slowing new orders and production. With the background of tariffs and retaliatory actions, a Dallas Fed report published on March 4 stated that Mexico’s GDP growth slowed down to only 0.9% YOY in Q4 2024 and is expected to slow down further. The report cited lower investment, slowing consumption and a contracting energy sector. In Europe, the inflation rate dropped 0.1% to 2.4% in February while the unemployment rate was stable at 6.2%. According to a newly released European Bank for Reconstruction and Development (EBRD) report, the economic forecast for emerging European economies was revised down by 0.3% to 3.2%. The countries most exposed to U.S. tariffs, particularly on steel and aluminum, were Bulgaria, Slovenia and Romania. In Asia, the HSBC India Manufacturing PMI retreated to a 14-month low of 56.3 from 57.7 in January due to a sharp slowdown in sales growth, its slowest expansion since December 2023.
Despite the volatile market conditions in February, all iBoxx USD Emerging Markets indices were positive, with the Overall benchmark achieving a return of 1.42%, an increase of 50 bps from January. Notably, the Overall IG bonds outperformed the Overall HY bonds by 108 bps, in contrast with the previous month (please refer to the Appendix at the end of this document for the abbreviated index names). The Sovg & Sub-Sovg HY indices experienced a significant slowdown, posting a monthly return of just 0.15%, down 159 bps from January’s 1.74%. Sovg & Sub-Sovg IG bonds surpassed the Overall benchmark by 66 bps and the Sovg & Sub-Sovg by 69 bps. On the corporate front, the performance was more evenly distributed, with Corporates IG outperforming Corporates HY by just 15 bps. Liquid Sovg & Sub-Sovg indices recorded a monthly return of 1.39%, aligning closely with their benchmark. However, Overall HY and Sovg & Sub-Sovg HY indices lagged in tracking their one-year returns.
Supported by a 25 bps decline in U.S. Treasury yields, the yields for the top 10 economies tracked by the Overall index also dropped. The highest yield compressions were experienced by China at -30 bps, South Korea at -30 bps and Mexico at -29 bps. In February, Mexico, Chile and Qatar posted the highest returns of the group at 2.41%, 2.35% and 1.85%, respectively.
