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The traditional hierarchy of debt in Europe is facing its latest shake-up as worsening public finances in Belgium threaten to turn some of the region’s once-safest bonds into a risky bet.Belgium was cut by S&P Global Ratings, the second downgrade by a credit assessor in a week on the country running the euro area’s biggest budget deficits.The company lowered its score by one step to AA-, its fourth-highest level, and put a stable outlook on that view.“Belgium faces significant fiscal challenges, illustrated by a widening budget deficit in 2025 and its slow budgetary consolidation planned for 2026-2029, which may prove difficult to implement,” S&P said in a statement. “As a result, we now project that net government debt will increase to 109% of GDP in 2029 from 103% in 2025, with a corresponding increase in interest payments.”The distinction between Europe’s safest and riskiest bonds, forged in its debt crisis over a decade ago when the likes of Spain, Portugal and Ireland all needed bailouts, is now fading. Borrowing costs for Belgium, home to the European Union’s institutions, have climbed above all of those so-called “peripheral” countries.“We have completely neglected public finances and are the worst in all of Europe,” said Bart De Wever, prime minister of Belgium, at a meeting of EU leaders in Cyprus. “We cannot continue down this path.”Belgium’s 10-year yields are currently just below those of France, whose own standing has been hit by a succession of collapsed governments and budget wrangles. Both countries were seen by bond veterans as among the “core” of Europe’s debt, leaving just Germany to be considered as a bond haven.“Belgium is typically compared with and traded against France,” said Ales Koutny, head of international rates at Vanguard. “One can argue that Belgium’s fiscal position is deteriorating more rapidly than France’s.”Nicolas Forest, Brussels-based chief investment officer at Candriam, expects the gap between Belgium’s and France’s borrowing costs to close, and prefers to own Spanish and Portuguese bonds.“The situation in Belgium remains fragile,” Forest said. “We believe that an additional downgrade could put further pressure.”While the latest surge in Belgian yields has been driven by worries about inflation and energy security following the war in the Middle East, they have been grinding higher for several years. Moody’s downgrade of Belgium to A1 followed an equivalent cut from Fitch Ratings last year.The next catalyst for a selloff could come from S&P’s assessment of the country. Its current rating at AA — two notches above the scores of Fitch and Moody’s — has been skewed towards a possible downgrade for the past year.“We continue to favor euro-area sovereigns with a clearer path to fiscal improvement, such as Ireland and Spain,” said Niall Scanlon, a fixed income portfolio manager at Mediolanum.Belgium’s finances are being hurt by the rising borrowing costs, an aging population, and increased defense spending. Its debt is set to rise at a pace second only to the US among advanced economies, according to the International Monetary Fund, with the ratio to gross domestic product seen reaching 122% within half a decade. That would be the biggest in Europe after Italy.Still, the market’s reaction has so far been relatively muted. While ratings downgrades risk forcing funds with ultra-strict investment criteria to sell a country’s bonds, some investors tweaked their benchmark rules last year to avoid forced liquidations as France got downgraded.The spread of Belgian yields over Germany — a gauge of risk since German bunds have long been seen as the region’s safest — has widened three basis points this week, to 57 basis points.Larissa de Barros Fritz, a fixed income strategist at ABN Amro Bank NV, expects that to escalate. Alongside Belgium’s existing debt woes, she points to vulnerability stemming from its energy-intensive economy.“Spreads are not yet fully pricing in the gloomy fiscal situation in Belgium,” she said, forecasting a widening to 70 basis points this year. “Belgium is one of the EU countries most exposed to energy supply disruptions coming from the Middle East.” 

Qatar National Bank (QNB) stated that despite significant global macro uncertainty and volatility, emerging markets (EM) are benefiting from moderately positive capital inflows. These inflows have been driven by a depreciating USD, the current cycle of monetary policy easing across major advanced economies, and the availability of high real yields in several sizable EMs. In its weekly economic commentary, QNB said: We believe such tailwinds should continue over the medium-term, particularly as the US further engages in more efforts to re-balance its economy via lower external deficits and manufacturing onshoring. Over the last several years, emerging markets (EM) have suffered from significant volatility in capital flows. This was driven by monetary instability, geopolitical uncertainty and a lack of broader risk appetite from global investors on allocations to non-US assets. According to the Institute of International Finance (IIF), non-resident portfolio inflows to EM, which represent allocations from foreign investors into local public assets, experienced a significant shift from negative territory to positive in late 2023 and continues to be moderately strong this year, even accelerating. The strong performance of EM assets is surprising in a year marked by record global economic policy uncertainty and volatility. In fact, traditionally, EM assets tend to sell-off with increasing uncertainty, as investors seek safe-havens. But this time seems to be different, and two main factors contribute to explaining the inflows to EM. First, a softer dollar continues to bolster the attractiveness of higher-yielding EM assets, providing a tailwind for capital inflows. Under favourable conditions, global investors fund positions in relatively low-yielding currencies of advanced economies, such as the USD, and seek higher-yielding EM assets. A weaker dollar reinforces this tendency by reducing the currency risk for investing in EM. Furthermore, a weaker dollar lessens the burden of debt services of USD-denominated debt for sovereigns and corporates in EM, improving credit quality and reducing risk premiums, therefore favouring portfolio rebalancing towards EM assets. So far this year, the USD has fallen by more than 10% against a basket of currencies of advanced economies and 8% against a basket of EM currencies. Standard measures of currency valuations, such as the real exchange rates, show that the USD still remains "overvalued." Structural factors also point to an environment dominated by further selling pressure for the greenback. The Trump administration seems to be keen to engineer a major adjustment of the economy, favouring narrower current account deficits and the re-shoring of critical manufacturing activities, which would call for additional USD depreciation. This lessens the role of the USD and US Treasuries as safe havens amid global economic instability, contributing to calls for the diversification of portfolios, including via EM assets. Second, the easing of monetary policy by major central banks results in lower yields and looser financial conditions in advanced economies, increasing the relative attractiveness of EM assets. This year, the European Central Bank (ECB) continued its easing cycle, bringing the benchmark interest rate to a neutral stance of 2%, after cutting rates by 200 basis points (bp) since mid-2024. The Federal Reserve re-started its downward cycle with a 25 bps cut, with markets currently pricing a federal funds rate of 3% by the end of 2026, which will continue to diminish the opportunity cost for investing in EM assets. This backdrop of lower rates in advanced economies provides additional support for positive capital flows into EM. Third, several large EMs, particularly in Asia and Latin America, are currently offering yields that are significantly higher than their inflation rates. Those positive "real rates" from countries like Indonesia, Brazil, Mexico and South Africa, for example, contribute to providing higher gain potential and re-assure investors against potential risks of undue currency depreciation. This favours the so-called "carry trade" of borrowing from low-yielding currencies to invest in high-yielding EM currencies. Importantly, the carry trade seems to be the dominant feature of the capital flows to EMs so far in 2025, as the vast majority of inflows are concentrated in debt rather than equity and in jurisdictions with more floating currencies as well as higher real yields.