Fixed Income Weekly Higher for longer

Fixed Income Weekly Higher for longer Jorge Garayo Short-rate expectations have pushed higher again across developed markets. Rising inflation concerns linked to the Middle East conflict, resilient economies and hawkish central banks Ninon Bachet have prompted our economists to revise their rate forecasts for the Fed, ECB and BoJ. The key question for investors is whether markets have priced enough tightening and how much Mathias Kpade further bond weakness can extend.  How high? Renewed energy and inflation concerns have driven a further hawkish repricing Anastasiia Tregubova of ECB expectations and pushed Bund yields higher. We are not in overshoot territory yet but current pricing appears sufficiently hawkish and could consolidate near term. The rebuilding of the term Anamika Misra premium keeps us bearish over the medium term.  A decent growth outlook. The eurozone growth is proving resilient, supported by stronger Stephen Spratt data and German fiscal stimulus despite ongoing geopolitical risks. While this reinforces a higher- for-longer rates outlook, longs in 5-year real yields offer an attractive risk-reward trade-off. Reo Sakida  EGBs. Increasing gas prices remain a headwind for BTPs, but Italy has a storage buffer. If risk sentiment improves and 2027 budget negotations are smooth, it should keep BTP-Bund range- Tanmay Purohit bound. The trend is for wider OAT-Bund however, amid political uncertainty and softer demand.

 UK: Receiving UK 2y swaps versus the US remains our preferred expression of diverging central bank paths. At the long end, we see limited scope for a meaningful dislocation caused by either supply or the Autumn Budget.

 Covered bonds – Front-end remains in focus. While issuance volumes have moderated from the strong pace seen in recent weeks, demand remains robust, particularly at the front end of the curve. We suggest to overweight the front end of the curve.

 AUD Rates – Path picked. Short-end steepens = higher for longer. We stop out of IRZ6/Z7. Flatteners need to be further out (1y1y/2y1y) or big (3s10s). Look to lean in if NAB data strong.

 JPY Rates – After the blow off top = consolidation time. 1y1y aligns with our BoJ view + positions short + 5y hits exhaustion stage + 10s stuck at 3%. Take profit JGB 2x1 5s30s flatteners.

Graph 1. Front-ends pushing higher across global fixed income Graph 2. The steepening of the ER8-ER4 spread consistent with markets higher for longer and less concerns about future growth

Basis point -Jun 16-Jun 01-Jul 16-Jul 31-Jul 15-Aug 30-Aug CAD 1y1y JPY 1y1y AUD 1y1y USD 1y1y EUR 1y1y GBP 1y1y Dec-27-Dec-26 Euribor futures SG Cross Asset Research/Rates, Bloomberg SG Cross Asset Research/Rates, Bloomberg

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Summary of Tactical & Strategic opportunities VIEW TRADES USD rates Recent changes to the Fed and Treasury communication have Absent a material shift in the macro environment, prevailing market contributed to greater uncertainty around policy outlook, resulting conditions suggest further upward pressure on yields and in higher realized volatility and elevated term premia across the continued curve steepening. curve. While expanded long-end buybacks may provide temporary support for the back end, they do little to alter the combination of sticky inflation, and fiscal concerns. Investors remain focused on any additional policy signals from Fed officials, with long-end yields likely to remain under upward pressure and the curve biased towards further steepening. EUR rates The repricing of ECB terminal rate towards 3% has driven 10y Bund Keep term premium rebuilding proxies: pay EUR 10y vs receive to our 4Q target. This is sufficiently hawkish, suggesting that some 60% of 2y. consolidation around current levels is likely. However, if the market Keep receiving Sonia 2y vs SOFR 2y (entered at 22bp, target 0bp). prices another hike, we believe this would be excessive given the Buy EUR 6m2y ATMF/+30bp 1x2 payer spread, zero cost growth and inflation outlook. We would therefore look to fade the (indicative) – link move if the 10y Bund yield…