We maintain a neutral strategic stance on US duration and rely on tactical implementation. Growth momentum continues to look resilient rather than fragile, and the labour market is showing signs of stabilising at lower levels rather than accelerating deterioration. Survey data supports this view, and high-frequency growth tracking remains firm, reinforcing our assessment that recession risks are not the central case in the near term.
This resilience limits the case for adding outright duration aggressively. At the same time, yield levels are more reasonable than they were earlier in the cycle, and the Federal Reserve still carries a mild easing bias. Policy projections continue to show that most FOMC members expect further cuts over the forecast horizon, which keeps downside risks to front-end yields in the distribution even if markets are already discounting part of that path. We therefore remain flexible: we do not treat duration as a one-way trade, and we remain as willing to add duration at attractive levels as we are to reduce it when valuations and data warrant.
We favour a steepening bias, with a front end that can remain anchored by policy expectations while the long end remains exposed to term-premium dynamics, fiscal uncertainty and credibility-sensitive risk premia. The public debate around central bank independence reinforces this asymmetry: if perceived policy constraints increase, the front end can become too low relative to fundamentals while the long end demands compensation, creating a twist-steepening profile. We therefore maintain a steepening bias, notably via a 5-30 steepener.
We also maintain a constructive view on US inflation exposure. Recent inflation outcomes are benign, yet we observe that inflation dynamics can reassert themselves quickly as market pricing becomes more complacent. For this reason, when we do hold duration risk, we prefer structures that are more resilient to inflation uncertainty. Holding duration through real yields rather than nominals aligns with this balance: it retains duration optionality while acknowledging that inflation risk remains a meaningful driver of long-end pricing.
In euro rates, we hold a modest long duration bias. The risk-reward looks more balanced at current yield levels. Our framework remains broadly neutral overall, which keeps conviction contained, but two elements support a modest long stance: disinflation dynamics remain the dominant near-term signal, and valuation is less stretched than it was previously. Carry remains an additional stabiliser, particularly when implemented with discipline around entry levels.
Recession probability has eased off, and while PMIs have softened in several core countries, the broader signal sits around the threshold consistent with modest growth. We also observe pockets of improvement, including German construction indicators, and we continue to see Spain as a relative bright spot in the eurozone’s growth mix. This environment supports a cautious long stance.
Inflation remains central to our euro rates view. The recent profile shows headline inflation close to target and core easing, and we expect further deceleration ahead. This supports a market environment where the ECB remains comfortable with its stance. Even with growth proving more resilient than feared, the inflation trajectory keeps policy expectations relatively contained.
Supply is the main counterweight. Gross issuance expectations are elevated in several core markets, including Germany, the Netherlands and Finland. Net issuance is more manageable at aggregate level, but we continue to monitor where absorption capacity could be tested. Recent sovereign deals were exceptionally well absorbed, in some cases oversubscribed by more than ten times. We are therefore comfortable holding a small long while acknowledging that supply can limit the speed and magnitude of any rally.
We complement our modest euro duration stance with higher-conviction curve and country expressions. We maintain a 10-30 steepener because structural forces, including Dutch pension fund-related dynamics, support a continuation of the steepening trend despite short-term volatility. On country allocation, we remain positive on Spain and continue to see relative value in selected Central and Eastern European markets such as Slovenia, Slovakia and Bulgaria, while we stay cautious on France and maintain a negative bias on Belgium.
In the UK, we remain positive and continue to hold a UK rates outperformance view versus the US. Our rationale rests on the UK’s macro structure and the terminal-rate debate: we do not believe UK rates will sustainably price above US rates over the medium term. This view supports a continued preference for UK duration relative to the US, particularly in the front end where repricing has been most meaningful. We maintain a clear reassessment level: as UK rates approach and potentially trade below US rates at the relevant point on the curve, we will reassess sizing and remaining upside.
In Australia, we hold a long AUD rates position. Market pricing implies rate hikes into 2026 that we do not see as necessary, given the macro and policy backdrop. The market’s hawkish expectations look inconsistent with an inflation profile trending back towards target and with an economy that does not display the kind of overheating that historically justifies a sustained premium versus US policy rates. Historically, Australia’s policy rate has sat meaningfully above the US only in specific regimes – most notably during the pre-2015 China-driven commodity boom – and we do not view the current environment as a return to that regime. This makes the current valuation and policy expectations gap an attractive basis for a long position.
We maintain a constructive allocation stance towards emerging market debt, favouring the local currency and corporate segments. Spread have tightened rapidly in hard currency sovereigns. Performance has been strong, attracting flows, with investors returning after several years of net outflows. This flow backdrop supports demand for carry assets even when spreads are no longer cheap in absolute terms.
Within hard currency sovereigns, we acknowledge that tightening is driven disproportionately by high yield and by idiosyncratic stories, with investment grade remaining comparatively range-bound. Event-driven moves contribute to index strength, which reinforces the point that a portion of recent gains reflects story-specific compression rather than a broad-based rerating of fundamentals. As spreads tighten quickly, the return profile shifts from compression-driven to carry-driven, which naturally warrants more selectivity and a greater emphasis on entry valuations.
In EM corporates, the valuation picture remains more supportive. Spreads have tightened, but have not compressed as much as sovereigns and still offer a pickup versus comparable US credit in several segments, particularly investment grade. Balance sheets often screen as solid, and corporate fundamentals in many EM markets remain compatible with carry strategies, provided issuer selection remains disciplined. This supports our positive stance on EM corporates as a core carry allocation within EM.
Local currency EM remains attractive. Over long horizons, FX depreciation can absorb a large part of the carry in local markets, which reinforces our current approach: we prefer local markets where carry is high relative to volatility and where macro and policy settings support at least stability, and ideally appreciation, in the currency. We therefore focus local exposure on currencies with strong carry-to-volatility profiles and supportive fundamentals, including a preference for BRL and ZAR, alongside more defensive carry exposure such as IDR.
We remain negative on the US dollar and maintain a short USD stance. Our rationale is grounded in asymmetry: even in a scenario where US growth remains firm, policy credibility and governance narratives can generate bouts of dollar weakness, while the upside for the dollar is more constrained when (excessive?) policy easing remains a meaningful possibility. This stance is consistent with our broader rates view, where curve steepening risk and inflation uncertainty can coexist with front-end anchoring, a mix that does not support USD strength.
We maintain a long JPY position and continue to express valuation-driven yen strength over the medium term. We also hold a short sterling versus yen trade despite near-term momentum not being supportive. The fundamental rationale remains intact: the yen screens cheap on valuation metrics, and the probability of policy sensitivity increases as levels approach ranges that historically attract official attention. On the back of this, we are willing to tolerate short-term volatility in exchange for medium-term asymmetry.
In Europe, we remain constructive on Scandinavian currencies versus the euro, notably SEK and NOK. Both currencies have been weak, and we see scope for appreciation as relative growth and rate dynamics stabilise. We took profit on the forint after strong performance.
We are constructive on investment grade corporate credit. Carry remains attractive, fundamentals are broadly resilient, and in terms of technicals, continue to benefit from persistent demand. At the same time, spreads are tight across major markets, which keeps us selective and prevents us from taking an indiscriminate beta stance. In this late-cycle context, we are focused on issuer quality, liquidity and cash flow visibility, using valuation discipline to decide where and when to add risk.
In euro investment grade, we hold a modest overweight stance. The macro backdrop is low growth but stable, the ECB is set to remain in “wait and see” mode for the foreseeable future, and corporate fundamentals are showing no immediate signs of stress. Valuations are not cheap, but our fair value assumptions place the market near the bottom of a reasonable range, which supports maintaining a positive view without chasing spreads tighter. Issuance is active - including in corporate hybrids - yet flows remain supportive, and primary supply is absorbed without obvious dislocation. This keeps the euro IG allocation constructive, with an emphasis on selectivity rather than broad spread-compression expectations.
In US investment grade, we are increasing our stance modestly to a +0.5 tactical overweight. A meaningful decline in USD/EUR hedging costs improves the relative attractiveness of US IG for euro-based investors, with hedged yields now close to euro equivalents. US supply is heavy and remains a key variable, but demand conditions appear robust and risk appetite is resilient.
We remain neutral on high yield in both Europe and the US. In Euro high yield, risk premia look thin and default rates can drift higher from currently benign levels even without a recession. Refinancing still occurs at higher all-in yields than in the prior cycle, which creates a medium-term headwind for marginal issuers. In US high yield, we also remain neutral, given the issuance backdrop and the late-cycle dynamics of the market, even though a supportive fiscal impulse remains an upside risk that can cushion parts of the market.
Within financials, we remain constructive on EUR AT1s, reflecting our preference for carry supported by stronger capital frameworks and issuer quality.
Across credit, our implementation preference remains consistent: we emphasise large, diversified issuers with robust cash generation and visible free cash flow. We favour quality carry and we use widening episodes to add exposure rather than paying up for already tight spreads.
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