FICC
| Bonds
Bond market analysis on where to position across government bonds, credit, and inflation-linked debt.
The labor market tightened in January, significantly lowering the odds of a H1 2026 rate cut. Rate cuts driven by lower inflation are still likely in H2 2026.
What’s driving government bond yields, and how do different bond markets impact each other? In today's Strategy Insight, we decompose yield moves into global drivers and idiosyncratic local drivers.
The ECB is about to make its first policy mistake in the current cycle by being complacent about the downside risks to inflation. The confluence of base effects, a stronger euro, food and energy deflation, and rapid services disinflation will push headline inflation closer to 1% in the first half of the year. This significant undershoot will force the ECB to deliver reflationary cuts. Go long the September 2026 3-month Euribor futures and tactically reduce exposure to inflation-linked bonds in the Eurozone.
This week’s central bank meetings are a good reminder that monetary policy can still surprise. The Bank of England sounded more dovish, and the European Central Bank sounded complacent about the inflation undershoot. Meanwhile, the Reserve Bank of Australia hiked rates earlier this week. Investors should remain overweight UK Gilts, position for more ECB easing by going long the September 2026 3-month Euribor futures, and fade further rate hikes priced in Australia.
The Fed will keep rates on hold in H1 2026, but dovish policy surprises are likely in the second half of the year.
The 10-year Treasury term premium is now competitive with Baa- and Ba-rated credit spreads. Even without term premium compression, duration carry trades could outperform credit carry trades in a low rate vol environment.
In our 2026 inflation outlook, we explain why 2026 will bring more disinflation, upside risks remain contained, and how to position in ILBs across major markets.