US Rates: Neutral duration, exiting steepeners, retaining real yield exposure.
We are moving to a neutral stance on US duration this month after our tactical long. While the macro backdrop remains broadly resilient, the balance of risks across the curve has shifted sufficiently to warrant a recalibration of our positioning.
Growth indicators continue to surprise positively. ISM surveys have rebounded, services remain firmly expansionary, and there is no clear evidence of a material deterioration in labour market conditions. Although job openings have eased, layoffs remain contained and high-frequency data does not yet point to a sharp slowdown. Our central macro scenario remains one of moderate but positive growth.
Inflation dynamics are stable overall. Goods inflation has shown signs of firming, partly reflecting tariff pass-through risks, while services inflation remains sticky but not accelerating. This environment does not provide a compelling case for aggressive duration exposure.
Against this backdrop, we have downgraded our 5Y US Treasury position from overweight to neutral. Valuations are close to fair value under reasonable assumptions for policy rates and oil prices, and markets are already pricing a meaningful easing path for 2026. With growth holding up and inflation stable, the margin for further front-end-driven rallies appears more limited.
At the same time, we have upgraded the 30Y from underweight to neutral, thereby exiting our steepening bias. Several elements support this adjustment. First, long-end yields have approached levels that incorporate a significant term-premium component. Second, fiscal expansion combined with a potentially more flexible monetary stance under the incoming Fed leadership introduces two-sided risks for long maturities. Third, technicals suggest the 30-year is near the lower end of its recent range, reducing the asymmetry of maintaining an outright short bias.
The result is a neutral stance across the curve, with less conviction in curve steepening. We remain mindful that a combination of fiscal expansion and accommodative monetary rhetoric could reintroduce steepening pressures, but at current yield levels, we prefer to avoid directional curve exposure.
We continue to favour holding duration risk through real yields rather than nominals. Inflation risks remain asymmetric given tariff dynamics and potential fiscal stimulus, and break-evens have rebounded meaningfully. While we have taken partial profit after the recent move, we retain a constructive stance on US inflation exposure in the 3-5 year segment.
Overall, US rates now reflect a more balanced risk-reward profile. We prefer to wait for clearer dislocations before re-engaging with higher conviction.
EUR Rates: Modest long bias, structural steepening, selective country allocation.
We maintain a modest long duration bias in euro rates. The macro environment remains characterised by moderate growth and continued disinflation, which supports holding duration at current yield levels.
Inflation has eased further across the eurozone, with headline prints now broadly below 2% in several jurisdictions. Core inflation is gradually decelerating. Our framework continues to assign a high probability to further disinflation over the coming quarters. In this context, the ECB remains in a “hold with optionality” mode, with a relatively high bar for renewed tightening. Market pricing of monetary policy remains broadly flat, reinforcing the attractiveness of carry.
Growth momentum is gradually improving from low levels. PMIs are stabilising above contraction territory, and forward-looking indicators suggest that fiscal initiatives (notably in Germany) could support activity later in the year. This keeps us constructive but measured in our duration exposure.
Supply pressures were significant at the start of the year but are being absorbed effectively. Order books remain strong, and sovereign issuance has met robust demand. We acknowledge that net issuance is higher than in previous years, but the market’s absorption capacity has so far proven resilient.
We continue to favour a 10–30 steepening bias in euro curves. Structural forces, including pension fund reallocation dynamics in the Netherlands, remain supportive of ongoing steepening over the medium term. Despite the move already made, we believe further structural demand shifts could extend the trend.
On country allocation, we remain:
- Positive on Spain.
- Constructive on selected Central and Eastern European sovereigns, including Slovenia, Slovakia and Bulgaria.
- Negative on Belgium.
- Neutral on France.
Overall, the eurozone offers a more favourable duration backdrop than the US at this stage, supported by disinflation, anchored policy expectations and interesting carry.
Emerging Markets: Carry remains compelling, preference for local currency and corporates.
We maintain a constructive stance towards emerging market debt, with a preference for local currency and corporate segments.
Hard currency sovereign spreads are tight by historical standards. Performance has been driven disproportionately by high-yield and idiosyncratic stories, while investment grade has lagged. At current spread levels, further compression-driven returns are unlikely, and the return profile is shifting towards carry. We therefore remain neutral on hard currency sovereigns.
In contrast, EM corporates continue to offer compelling yield pickup relative to US credit, with generally solid balance sheets and manageable net financing dynamics. Supply has been robust but well absorbed. We retain a positive stance on EM hard currency corporates as a core carry allocation.
Local currency EM remains particularly compelling. The weaker US dollar environment has supported FX performance, and several central banks retain room to ease policy gradually. We are focused on currencies and markets where carry remains high relative to volatility and where inflation trends are supportive.
Within EM FX, we continue to see selective opportunity, particularly in a softer USD regime. However, we have rotated exposures to reflect evolving relative value.
We remain constructive on BRL and ZAR, both of which continue to offer compelling carry relative to volatility and are supported by policy that credibly anchors inflation expectations. These remain core EM FX exposures within our allocation.
We have upgraded KRW, adding a long position. The Korean won offers interesting relative valuation and cyclical leverage within Asia, and benefits from stable macro dynamics in an environment where global trade concerns have moderated at the margin.
Conversely, we have closed our long IDR position, downgrading it within the EM basket. The decision reflects portfolio reallocation rather than a deterioration in fundamentals. Following a period of stabilisation and relative performance, the carry-to-risk profile appears less compelling compared to other EM opportunities.
Currencies: Short USD bias maintained
We remain underweight the US dollar. While US macro data has held up relatively well, policy uncertainty and credibility concerns continue to generate episodic dollar weakness. The asymmetry remains skewed: further USD upside appears constrained, given current positioning and valuation, whereas political and fiscal narratives can still trigger renewed downside pressure. Our short USD stance therefore remains intact.
We also maintain our long JPY position. The yen continues to screen positively on valuation metrics, and the probability of further Bank of Japan normalisation supports medium-term appreciation. Political uncertainty has diminished following the recent election outcome, and the risk of official sensitivity to excessive currency weakness remains present. We are prepared to tolerate short-term volatility in exchange for medium-term asymmetry.
We remain short GBP, reflecting both political uncertainty and a marginally more dovish Bank of England stance than currently priced. While we retain constructive exposure to UK rates, the currency faces a less favourable risk-reward profile, particularly if fiscal or political dynamics reintroduce risk premia.
This month, we have rotated selectively within G10:
- We initiated a long NZD position. Domestic fundamentals have stabilised and the RBNZ is perceived to be at the end of its easing cycle, with markets already beginning to price eventual tightening. In a weaker USD environment, the NZD offers cyclical leverage with improving carry expectations.
- We initiated a tactical short CHF position. Valuation appears stretched, and with inflation subdued in Switzerland, the SNB has limited tolerance for renewed currency strength. While we acknowledge the franc’s safe-haven characteristics, current levels justify a more tactical short bias.
- We took profit on SEK and NOK, effectively downgrading both from prior overweight positions. Scandinavian currencies have performed strongly year-to-date, and positioning has become more extended. The adjustment reflects risk management rather than a structural bearish shift. In Norway specifically, commodity volatility and inflation uncertainty argue for a more balanced stance at current levels.
Corporate Credit: Selective risk-taking; more cautious on high yield.
Credit markets have entered a more differentiated phase. We are adjusting our positioning accordingly.
We remain constructive on euro investment grade, where fundamentals are solid, demand remains robust and spreads, while tight, remain within reasonable fair-value ranges. Absolute yields above 4% in longer maturities continue to offer interesting carry relative to historical norms.
In contrast, we have moved to a more cautious stance on high yield, both in Europe and the US. Recent repricing in the software sector highlights vulnerabilities in more leveraged segments of the market, particularly where business models face structural disruption and balance sheets are stretched. Spread levels offer limited compensation for these risks.
We move to neutral on US investment grade, reflecting more balanced valuation and supply dynamics.
Within financials, we remain constructive on EUR AT1s[1], supported by strong capital buffers and favourable regulatory frameworks.
In convertibles, we are turning more constructive following the sharp repricing in selected equity segments. The asset class offers attractive convexity at current levels, with downside protection via bond floors and participation in potential rebounds.
Across credit, our approach remains disciplined: we emphasise issuer quality, liquidity, and structural resilience, and we avoid indiscriminate beta exposure in a late-cycle environment.
[1]EURAT1s are a type of Contingent Convertible (CoCo) bond issued by banks, designed to provide capital buffers during financial distress.
