Two dials tell you most of what matters in bond markets:

Government bond yields the interest rate the safest states pay on their debt, and credit spreads, the extra interest companies pay on top, measured in basis points (100 bp = one percentage point). This week the dials point in opposite directions.

Both euro yields sit at the very top of their 12-month range: markets are positioning for further rate hikes.

Spreads tell the exact opposite story. Euro high yield bonds of riskier companies — pays just 250 bp extra, the bottom of its 12-month range and 27 bp less than its US counterpart. Investors demand record-high compensation from governments and record-low compensation from risky companies, in the same week.

What happened

The ECB held its deposit rate at 2.25% on Thursday, 23 July — but Lagarde called inflation risks “tilted to the upside,” and markets listened: 2-year yields jumped 10 bp to a fresh 12-month high. The reason is oil. Headline inflation eased to 2.8% in June, yet energy still runs 8.7% above last year, and if that seeps into wages and services, a 25 bp hike in September becomes likely.

Where I lean

Higher rates hit risky companies first: their debt comes due sooner, their margins are thinner. At 250 bp, credit markets are saying the refinancing wave will go smoothly — and that, to my eye, leaves very little cushion if September brings another hike. A view, clearly labeled as one.

The fair counterargument: companies locked in long maturities during the cheap-money years, defaults are low, and yield-hungry buyers keep compressing spreads. Two soft inflation prints or spreads absorbing a hike without widening, and my caution was simply early.

What to watch

30 July: first estimate of euro-area Q2 growth.

31 July: July inflation flash — the key number before the summer break.

19 August: full July inflation breakdown.

9–10 September: ECB decision, press conference on the 10th.

Rates markets are bracing for more, credit markets are enjoying the calm. One of them will need to adjust. Watching which one is what this newsletter is for. See you next Monday.

_{Data as of 23 July 2026. Spreads: ICE BofA indices via FRED (BAMLHE00EHYIOAS, BAMLH0A0HYM2, BAMLC0A0CM, BAMLEMEBCRPIEOAS). Yields: euro-area AAA curve, ECB Data Portal. Inflation: Eurostat. All calculations my own. Automated data pipeline, human judgment. Analysis and personal opinion — never investment advice.}