01/19/2025–The U.S. job market is steadying out, which basically means the Fed is probably done moving for a while—expect them to stay on hold at the January meeting and likely through the end of the year. There’s some noise about who the next Fed Chair will be, which should keep things from getting too crazy in the short term, but we’re making a tactical bet that the gap between long-term and short-term rates is going to shrink.
Over in Europe, a softer inflation report took some of the heat off, so everyone is dialing back their expectations for ECB hikes. We like German bonds right now, especially compared to U.S. Treasuries.
In Japan, things are a bit more tense–the Bank of Japan sounds surprisingly hawkish because they’re worried about rates staying too low for too long, plus those political tensions with China are a wildcard for growth.
On the emerging markets side, things actually look pretty good. We’re bumping up our growth forecasts and sticking with bets on countries like Brazil and Mexico—the fundamentals are solid and the yields are just too good to pass up
12/05/2025–In the US, we expect the Fed to deliver just 50bp of further cuts vs. 90bp priced in OIS forwards as US growth returns to trend and labor markets begin to stabilize. This should put upward pressure on front end yields, and in the near-term we prefer to express the bearish bias in 5Y via shorts in the belly of 2s/5s/10s butterflies. With sticky inflation, we hold longs in 1Y inflation swaps hedged for energy. Recession risks would present material bullish steepening risk, while a Supreme Court ruling against IEEPA tariffs or Governor Cook could drive term premia higher.
In the Euro area, above-trend growth and continued disinflation in core inflation keep the ECB on hold in 2026. With yields likely range bound we have bias for trading duration tactically on the long side in 5-10Y sectors outright and vs. USTs. Intra-EMU, we see a sanguine outlook with a focus on carry 1H26.
In the UK, we see three cuts by mid-2026 and have a bullish bias on front-end SONIA into early 2026 outright and vs. SOFR.
In Japan, we see a continued upward trend in JGB yields in 2026, with risks asymmetrically skewed for steepening given fiscal discussions and structural supply-demand imbalances. We hold tactical 15s/35s steepeners and look to tactically fade richness in front-end swaps and 5s on the JGB curve.
In EM, lower macro vol is set to continue supporting EM local markets in 2026. The EM disinflation process is tapering but inflation is set to stabilize as EM easing cycles draw to a close, and we see this year’s shift back to inflows into EM bond funds continuing after persistent outflows in recent years. We stay OW in EM local duration via OWs in Romania, South Africa, Brazil, Mexico and DomRep, partially offset by UW Poland and Peru as well as a short duration overlay
10/04/2025–In the United States, although the government shutdown restricted the release of economic data, the available employment indicators pointed to a mild slowdown, including a disappointing ADP report, while state-level figures indicate that initial jobless claims are still at low levels. We maintain a short position in 10-year U.S. Treasuries based on current valuations. Worries about Federal Reserve autonomy have been deferred to next year following the Supreme Court’s temporary halt on removing Lisa Cook. However, we retain our 5s/20s steepener trades, as a decision on the IEEPA might arrive shortly after the November 5th oral arguments—with a strong chance of an unfavorable outcome for the administration—and we anticipate the Treasury revealing a sequence of auction size expansions starting from May 2026.
In the Eurozone, we continue to feel confident with a slight medium-term positive outlook on duration, favoring the 10-year segment, and we hold long positions in 10-year Bunds relative to USTs due to appealing valuations. Within the EMU, we remain overweight in 10-year Spanish bonds compared to those of France and Germany. In the United Kingdom, the Labour Party conference offered minimal insights into fiscal policies. We sustain our 2s/10s gilt curve steepener positions amid persistent fiscal ambiguity, and we maintain holdings in December 2025/December 2026 MPC OIS contracts. In Japan, the Bank of Japan’s meeting minutes and a robust Tankan survey bolster our expectation for an October rate increase. We view the recent strengthening in 10-year JGBs as excessive, so we’re realizing gains on 10s/30s swap spread curve flatteners and exiting our 2s/10s flattener trades.
In emerging markets, the potential for declining U.S. real yields and renewed inflows into EM local bonds offer ongoing support. In countries like South Africa, improved terms of trade add extra backing, with foreign holdings still at modest levels. We keep an overweight stance on South Africa within our EM local bond holdings. On a wider scale, we remain overweight in EM local bond duration, featuring overweights in Malaysia, Hungary, Romania, South Africa, Mexico, and the Dominican Republic, counterbalanced by an underweight in Thailand and a short duration hedge.
06/18/2025–Bonds rallied this week amid somewhat softer data, including weaker than expected US inflation prints. Ahead of the FOMC meeting, we expect only cosmetic changes to the post-meeting statement. Trade tensions should deliver subtrend growth in 2H, but consumer income growth should help avert a recession while firm inflation keeps the Fed on hold until the Dec meeting. With front-end yields in the middle of their recent ranges we stay neutral on duration and look for 2Y yields to rise close to 4.1% before adding. We stop out of 2s/5s steepeners given a reduced recession risk, and add tactical 10s/30s UST curve flatteners to position for a less dovish path of Fed easing.
In the Euro area, we maintain a modestly bullish outlook for duration into 2H25 on ongoing macro uncertainty from tariffs, still-elevated term premia and some structural demand for Bunds from eventual de-dollarization flows. We stay long 10Y Germany and hold longs in 1Yx1Y as it provides attractive exposure to a dovish scenario. In the UK, we continue to see cuts in Aug and Nov and see limited value in the frontend. With 10Y gilts trading rich and at the lower end of their ranges, we enter tactical shorts and keep 10s/30s curve steepeners. In Japan, we see the BoJ delivering another hike in October and continuing to increase its QT pace, putting upward pressure on JPY rates in coming quarters. We add 10s/30s JPY swap curve flatteners to 2s/10s JGB steepeners
03/10/2025—Bonds sold off this week with a marked underperformance of Euro area rates following the fiscal u-turn by Germany to boost defence and infrastructure spending. In the US, policy is tilting away from growth and toward a less business friendly direction with a broader tariff impulse and greater fiscal austerity. In addition, the labor market report contained some softer details. Combined with the Fed’s asymmetric dovish bias this means we lower UST yields in the medium-term, though elevated long positions in our Client Survey and the potential for firmer CPI data next week means we see near-term headwinds. We close shorts in 2Y USTs and 10s/30s steepeners and turn neutral.
In the Euro area, the German fiscal u-turn removed our downside risk bias to Euro area growth and ECB policy rate expectations, though uncertainty over potential drags from US trade policy remain. We see 10y yields declining to around 2.4% by end-2025, but the near-term focus will likely remain on German and broader European defence spending discussions and greater growth optimism. We stay neutral duration. In the UK, gilts sold off in sympathy with German bonds, though the read across to the UK is limited given budget constraints. We keep tactical longs in 1Yx1Y SONIA and have a bullish bias on 30Y gilts. In Japan, the spillover effects from Europe have prompted markets to reassess defense expenditures in Japan, and supply-demand dynamics continue to pose a challenge. We hold 1Yx1Y vs. 2Yx1Y JPY swap curve steepeners and 2s/10s JGB flatteners.
In EM, markets are adjusting to downside risks to growth in North America and upside risks in Europe. Thus far, the impact from uncertainties created by US tariff and trade policy, as well as governmental disruptions, appears to have focused on domestic sentiment. We remain UW on duration in EM local bonds given the ongoing global sell-off via UWs in Indonesia, Poland and Peru as well as a short duration overlay, partially offset by OWs in India, Thailand, Türkiye, Colombia, Dominican Republic and Mexico.
03/03/2025— Bonds rallied over the past week against a backdrop of softer US sentiment data and Euro area core inflation figures, as well as a renewed focus on tariff risks. Political developments appear to have weighted on recent sentiment surveys, though labor market data suggest unemployment remains in the low 4% range. With the front-end now at the lower end of its recent ranges, we see next week’s labor market data pointing to resilience, as valuations are no longer cheap, and positions are leaning long, we turn tactically bearish and add shorts in 2Y USTs. We also add 10s/30s flatteners as a short duration proxy with a relative value component as the curve looks too steep.
In the Euro area, we expect the ECB to cut rates next week, in line with market pricing, and see it moderating its language about rates being restrictive in a way that implies an easing bias. The results in the German election point to a coalition with CDU/CSU and SPD but with a blocking minority on debt brake reform suggesting spending on any defense reform would be gradual. We keep a medium-term bullish duration view and stay long 10y Germany, but take profit on tactical longs in 1Yx1Y €STR. In the UK, we stay long Jun25 MPC OIS as we continue to see a cut in May and continue its easing path in 2H24, and have a tactical bullish bias on 5Yx5Y SONIA vs. SOFR. In Japan, despite the rally over the past week the intermediate part of the curve looks cheap to fair value. We retain 2s/10s JGB curve flatteners.
In EM, some skepticism of US exceptionalism has provided some support, but uncertainty over tariffs and geopolitics more broadly remains as a headwind. We stay UW local bond duration overall via UWs in Indonesia, Poland and Peru as well as a short duration overlay only partially offset by OWs in India, Thailand, Czechia, Türkiye, Colombia and Dominican Republic.
02/21/2025—-Bonds sold off amid a re-pricing of easing expectations for many DM central banks, while the US outperformed amid softer economic data. The FOMC minutes reinforced a sense of a continued pause with an easing bias, and this asymmetric reaction function should provide continued support for Treasuries. At the same time, given that yields are at the lower end of their ranges we stay neutral on the front-end after taking profit last week. That said, given the pricing out of term pre-mia at the longer end, we would look to fade a further rally in 10Y yields, and keep 20s/30s flatteners as a low-beta bearish proxy.
In the Euro area, bonds underperformed amid a re-pricing of term premia over concerns over the need to fund higher defense and reconstruction expenditures. We stay long 10Y Germany as a medium-term strategic view, and tactically add long 1Yx1Y €STR swaps. Intra-EMU, we trim exposure tactically and take profit on long 10Y Spain vs. Germany. In the UK, bonds underperformed amid softer activity and stronger price and earnings data. We continue to trade the front-end tactically and add longs in Jun25 MPC OIS while taking profit on Mar25/Sep25 SONIA futures steepeners.
In Japan, 5y and 10y yields are trading cheap to fair value, but we see some scope for yields to rise given an ongoing repricing of BoJ expectations. We keep 2s/10s JGB curve flatteners as a bearish proxy (GFIMS, Feb 21st).
In EM, the deadlock around peace negotiations in the Russia-Ukraine conflict appears to have been broken. But the outlook and timeline for an eventual peace agreement or even cease-fire remains cloudy at this stage, even as markets have moved to price in a deal to various degrees (Ceasefire implications for EMEA EM, Feb 19th). While we reduced UWs by taking profit on UW Chile, we stay UW local bond duration overall via UWs in Indonesia and Poland as well as a short duration overlay only partially offset by OWs in India, Thailand, Czechia, Türkiye and Dominican Republic (EM Local Markets, Feb 14th).
02/08/2025—-Bonds extended their rally since mid-January amid some unwind in term premia as well as softer US ISM data. In the US, the stronger-than-expected labor market report saw some reversal on Friday as it reinforced a sense that the FOMC will remain on hold for now. Yields are now in the middle of their recent ranges but, with comments by Treasury Secretary Bessent having prompted some unwind of fiscal term premia, we see upside risks to yields given the unexpected drop in the unemployment rate to 4.0% and add 20s/30s flatteners as bearish proxy.
In the Euro area, there were limited domestic developments, but downside risks to our expectation of a terminal rate of 1.75% have increased given threats of tariff escalation. We stick with our strategic OW duration stance and hold longs in 10Y Germany, but tactically take profit on 1Yx1Y €STR swaps. Intra-EMU, we hold longs in 10Y Spain vs. Germany.
In the UK, the BoE cut rates by 25bp with mixed messaging despite two dissents in favor of a larger cut. We took profit on long Feb25 MPC OIS swaps and Aug25/Dec25 MPC OIS curve flatteners, and hold tactical Mar25/Sep25 SONIA futures steepeners as the curve is too flat vs. the level of yields.
In Japan, the BoJ minutes suggested a greater recognition of upside risks to inflation, and we continue to see additional rate hikes sooner than markets price in. We keep 2s/10s JGB curve flatteners as a bearish proxy (GFIMS, Feb 7th).
In EM, growth has remained resilient at the start of the year, but the threat of tariffs will likely hurt investment decisions and weigh on growth in coming quarters even if they ultimately are used only for leverage. While the lack of tariff implementation provides EM with some relief, we do not over-extrapolate this going forward and stay UW local bond duration overall. We hold UWs in Indonesia, Poland and Chile as well as a short duration overlay only partially offset by OWs in India, Thailand, Czechia, Türkiye and Dominican Republic