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