US rates: Keeping conviction at the front end
We retain a modest duration overweight in the two-to-five-year segment after September's sharp sell-off. Higher real yields have made valuations more appealing, but we keep conviction limited. Our strongest argument remains monetary policy: markets discount a terminal Fed rate around 4.75%[1], leaving room for a less extensive tightening cycle to support shorter maturities.
Recent downward revisions to core PCE inflation strengthen this case. Underlying inflation measures remain relatively contained, with limited evidence so far of energy costs feeding into core prices. We still expect further Fed tightening but see less justification for the prolonged cycle embedded in market pricing. The opportunity comes from a reassessment of policy expectations, rather than an assumption that inflation breakevens are likely to fall.
We remain cautious on the long end. Resilient growth, AI investment and the wealth effect from equity markets sustain demand, while fiscal borrowing and corporate capital expenditure compete for savings. Potential repatriation by Japanese investors adds another layer of pressure on global bond demand. These forces could keep term premia elevated even if underlying inflation moderates.
Substantial speculative shorts offer scope for supportive covering flows, but positioning has not prevented the recent sell-off. Energy prices, geopolitical developments and tariff policy remain material risks. We therefore maintain the small overweight without increasing it. Clearer evidence of slowing activity or easing inflation pressure would strengthen the case for a more confident stance.
EUR rates: Bund value meets French uncertainty
We maintain our duration overweight, centred on the 10Y Bund, alongside a 10/30 steepening bias. Our valuation framework points to a Bund yield around 3.25%, allowing for another ECB hike this year. Markets price roughly three further hikes by summer 2027 after September’s increase, a demanding path for an economy whose underlying growth prospects remain modest.
Improving year-end supply dynamics also support the position, with sovereign funding programmes well advanced. Speculative investors remain short, although those positions have diminished and cash investors are generally more positive on duration. Inflation is the principal risk factor. Headline readings are rising and activity has proved resilient. Limited pass-through so far into core inflation offers reassurance, but higher energy costs could still broaden price pressures. A prolonged energy shock would also weigh on regional growth, reinforcing our preference for European duration over the US.
France keeps sovereign risk in focus
We remain underweight in France and Belgium. French spreads have widened substantially, but the lack of a clear path to fiscal adjustment and the approaching presidential election leave few catalysts for sustained improvement. France’s average financing cost remains around 2%, but new borrowing costs exceed 4%[2]. With close to 40% of outstanding debt requiring refinancing over five years, persistently high yields would progressively increase the budget burden.
A credible fiscal programme could support a rally, but we continue to favour selected alternatives (including Hungary, Luxembourg, and the EU) where we find the balance of spread compensation and risks more compelling.
French uncertainty currently supports Bunds, but that relationship could reverse if the ECB takes forceful action to contain sovereign spreads. Communication may precede intervention, whose timing and conditions remain uncertain. Such support would require us to reassess both the French underweight and German duration exposure.
Other Developed Market rates: Australian rates remain our strongest DM conviction
We retain our Australian duration overweight against an underweight in New Zealand. Australia’s earlier, more forceful tightening is restraining activity, while New Zealand continues to benefit from the lagged effects of more accommodative policy. Improving New Zealand growth and the start of policy normalisation support our preference for Australian bonds in relative terms.
We remain neutral on UK rates. Recent outperformance has reduced the appeal of gilt spreads against Germany and the US, while the autumn budget keeps fiscal credibility in focus. The market’s favourable recent performance does not provide sufficient grounds to establish a broader positive conviction.
Emerging Markets: Carry is there, but a more positive view needs calmer Treasury and dollar markets
We remain moderately positive on hard currency sovereigns, local debt and EM corporates, although conviction has weakened. Higher absolute yields and continued inflows have supported the asset class[3]. Hard-currency yields have risen around 140 basis points this year, with the great majority coming from Treasury yields rather than spreads. Local bond yields above 6% also offer meaningful income[4].
In local currency markets, traders have increased their expectations for EM rate hikes alongside the repricing in developed markets. If the Fed ultimately needs less tightening than investors discount, local markets could benefit too. In hard currency, selected high yield sovereigns continue to offer more compelling relative value against US corporate credit than the investment grade segment, but this is not a broad-based assessment where valuations are still rich.
The cushion remains thin. Spreads are tight, local yield advantages over core DM markets have narrowed, and rising currency volatility is reducing the appeal of carry trades. Dollar strength has not yet undermined the investment case, but further appreciation or another sharp Treasury sell off could challenge our positive stance. We keep positions limited and look for stabilisation in US rates and the dollar before taking more risk.
Currencies: Relative value broadens the opportunity set
We maintain our long yen and short euro positions. The yen has held broadly stable against a strong dollar while outperforming other major currencies, despite rising global yields. However, positioning has become more crowded, with yen exposure near two-year highs and euro shorts at extreme levels. This argues for close monitoring of reversal risk.
Selling the shekel after exceptional strength
We introduced a short Israeli shekel position. The currency’s strong performance has coincided with technology strength, leaving it exposed if sentiment towards that sector weakens. Israeli monetary easing also contrasts with tightening elsewhere, while the authorities have expressed concern about currency strength. Elections remain a risk to monitor, but the position rests on these economic and technical drivers.
Expressing divergence through AUD and NZD
We also initiated a short Australian dollar against the New Zealand dollar. The economic divergence underlying our rates position also supports this currency expression: Australian growth is slowing as restrictive policy takes effect, while New Zealand activity is recovering. AUD/NZD has risen despite a stabilising, and more recently narrowing, interest-rate differential. We see scope for that divergence to correct and retain selected Asian currency longs elsewhere.
Corporate Credit: Fundamentals are strong, but possible sovereign spillover needs monitoring
We turn moderately positive on US investment grade and reduce our US high yield underweight, while moving AT1s to neutral. EUR investment grade remains moderately positive and EUR high yield remains negative. September’s widening improves entry levels, but sovereign volatility, fund outflows and refinancing costs still warrant selectivity.
Lower hyperscalers supply
Heavy technology issuance continues to influence spreads, with US technology investment grade trading wider than the broader market. We expect net US investment-grade supply to decline towards year-end, giving investors time to absorb recent issuance. Hyperscalers still have substantial financing needs for 2027, but a lighter calendar over the next two months should provide some relief.
This prospective improvement in supply, together with yields around 6%[5], supports the US investment grade upgrade. EUR investment grade also offers better value, with yields around 4.2%[6] and spreads close to 100 basis points. Company fundamentals remain broadly resilient, with no broad wave of fallen angels accompanying the widening. Nevertheless, continued European fund outflows and uncertainty over sovereign yields temper our appetite to add risk aggressively. We have trimmed some technology positions accumulated through earlier new issues and reduced overall credit beta, retaining flexibility until the French situation shows clearer signs of stabilisation.
AT1 caution reflects possible sovereign spillover
We reduced AT1s to neutral as a tactical response to market conditions. French sovereign stress creates scope for further volatility in subordinated bank debt, even as bank earnings remain sound. France’s substantial weight in European financial credit makes that sensitivity impossible for investors to ignore, even if we are not concerned about the soundness of French institutions.
US high yield earns a smaller underweight
US high yield yields near 8.3%[7], improved valuations and renewed demand justify taking some profits on our negative stance. The more resilient US economy also supports the adjustment, bringing our view into line with the modest underweight in Europe.
We remain selective in both markets. European borrowers face rising energy costs and renewed sovereign risk, while higher refinancing rates challenge leveraged businesses more generally. We favour issuers able to sustain positive free cash flow at higher interest costs. Better yields improve the opportunity set, but substantial forthcoming supply and uneven financing conditions keep us cautious.
[1] Source: Bloomberg 12 October 2026
[2] Source : Candriam 12 October 2026
[3] Source : Bloomberg 12 October 2026
[4] Source : JP Morgan 12 October 2026
[5] Source : Bloomberg 12 October 2026
[6] Source : Bloomberg 12 October 2026
[7] Source : Bloomberg 12 October 2026