We continue to view the labour market as the key determinant for US rates. If employment stabilises, we expect the long end of the curve – particularly maturities beyond ten years – to move higher. However, this outlook depends heavily on labour market data, which remains scarce due to the recent government shutdown. Despite this lack of visibility, we upgraded US rates intramonth following the sharp sell-off that occurred after the FOMC meeting. The market interpreted Chairman Powell’s comments – that a December move is “not a foregone conclusion” – as hawkish, which we believe was an overreaction. This type of response is consistent with what we would expect from the Fed, which would naturally be very reluctant to pre-commit to a cut under the current circumstances.
On relative fair value, US rates have clearly outperformed EUR rates. However, this does not necessarily indicate a floor; yields could still move lower. The terminal rate differential between the two regions remains priced at approximately 100 to 120 basis points. Consequently, relative fair value alone does not constitute a buy signal.
Turning to the limited US data available – primarily survey-based indicators – the picture appears resilient. The Senior Loan Officer Opinion Survey (SLOOS) held up, ISM services have picked up, and the Atlanta Fed’s GDPNow estimate remains strong. Negative signals are concentrated in the labour market, where second-tier indicators, such as the Challenger job cuts report, point to growing risks. Until recently, the prevailing trend was “low fire, low hire”, but the risk of layoffs accelerating is now material. In the absence of hard data, we see no reason to assume that the pre-shutdown trend has reversed.
Inflation remains too high for the Fed’s comfort, although recent surprises have generally been to the downside. Tariffs have not exerted the anticipated upwards pressure, at least not as quickly as expected. However, the sharp increase in ISM services prices paid is noteworthy, as this metric often serves as a reliable predictor of future inflation.
On monetary policy, three additional 25 basis-point cuts are currently priced into the terminal rate. A terminal rate of 3.25% appears broadly fair, perhaps slightly below the long-term neutral rate. While changes in Fed leadership introduce uncertainty, the chair alone cannot significantly shift policy without committee consensus. All else being equal, we believe the risks tilt towards more cuts rather than fewer.
Overall, we are therefore moderately positive on US rates. A breakout above 4.20% could compel us to become more positive. In terms of curve positioning, we maintain a 5–30 steepener on US rates. This reflects our expectation that the debate over Fed independence will resurface, particularly given recent interviews for the Fed chair position. A steepener with limited negative carry offers an attractive hedge under these circumstances.
Our framework for eurozone rates remains close to neutral. The business cycle has shifted from positive to neutral, reflecting greater resilience than previously anticipated. Technical factors remain supportive, and we are comfortable maintaining a neutral stance. Recent developments include a modest steepening of the curve, with the 10/30 spread returning to 60 basis points. Euro-denominated bonds still offer better value than US bonds hedged into euros.
From a fair value perspective, we see both the 2-year and 10-year tenors as broadly fairly valued. In terms of the business cycle, economic resilience is evident, especially in non-core countries. Inflation continues to decelerate, hovering around 2%, and we expect it to dip below that level in 2026. The ECB maintains that it is “in a good place,” but recent commentary suggests a hawkish tilt. The bar for a rate cut is now very high, and at this point we see another cut this year as highly unlikely. Technicals remain supportive in the short term, and positioning has not changed significantly.
At country level, fiscal concerns are most pronounced in France and Belgium. Nevertheless, we remain neutral on France and prefer to wait for lower spread levels before reinitiating a short position. Political dynamics remain complex, with the budget decision-making process subject to numerous amendments. We anticipate continued volatility in the coming weeks. We are overweight on Slovakia and Slovenia. On Italy, we see BTP-Bund spreads as fairly valued and don’t see any catalysts for continued strong outperformance in the near term. We continue to hold a 10-30 steepener trade after having re-initiated, particularly with the transition of Dutch pension funds continuing.
Canadian growth has exceeded expectations. The most recent cut was characterised as hawkish, signalling caution despite the move. The release of Canada’s first budget in 18 months revealed a widening deficit and increased spending, which introduces a bias towards higher rates over time. We believe the easing cycle is now complete. From a long-term perspective, Canadian rates appear expensive, and we maintain a short bias in this market.
Over the past month, we have increased our bias towards UK rates for two primary reasons: economic performance and fiscal developments. The government has recently again ruled out income tax hikes, thanks to higher-than-expected revenue projections. Despite these trends, the terminal rate remains priced at 3.5%, which is higher than the US terminal rate – a level we view as unsustainable. At the most recent Bank of England meeting, the decision not to cut was narrowly passed with a 4:5 vote, underscoring the proximity of policy easing. We believe there is an additional 20 to 25 basis points of performance potential in UK rates.
Last month, we held a positive grade across all emerging market asset classes. We are now returning to a neutral view on hard currency sovereigns, primarily due to valuations. Risk appetite in EMs has become increasingly extreme, and combined with tight spreads, this has prompted us to reduce our grade to neutral. We continue to favour corporates and local rates. Our framework suggests that EM local rates remain attractive because central banks have room to cut further, and we expect to see such cuts materialise next year. From a spread perspective, hard currency spreads are extremely tight, and EM corporates underperformed sovereigns during the recent rally.
On aggregate, we are relatively unconcerned about EM fundamentals, which remain strong and supported by the weakness of the dollar. As a result, we would expect to become buyers again on any significant softness in spreads.
Flows into emerging markets have strengthened this year, driven largely by local markets, which had been neglected in prior years. Currency depreciation against the US dollar had eroded the advantage of higher carry, leading to underperformance of local currency debt relative to hard currency debt. Central banks have maintained a hawkish stance, and political risk remains a factor. Despite these risks, we retain a constructive view on select EM FX positions.
We are entering the late cycle phase in credit markets. Valuations are tight, as risks in the market are accumulating. This is a market phase that demands highly selective credit selection and prudent beta management. We do not see immediate triggers for spread expansions on the horizon, but we believe that portfolios need to be positioned for resilience.
On EUR IG, we remain cautiously constructive, with fundamentals and a benign macro backdrop acting as supports and justifying the carry pickup that can be had despite tight valuations. We are also upgrading EUR AT1s subordinated financial debt, as we continue to see the banking sector as resilient and well capitalised. From a fundamental perspective, we therefore think these are still some of the best-valued risk premia available in the market.
Within EUR IG corporates, industrials have performed well, driven by AI-related names such as Legrand and Schneider. The automotive sector has shown weakness, though less than anticipated. Travel and leisure demand remains robust, while chemicals – exemplified by Saint-Gobain – continue to struggle. Bank earnings for Q3 were solid.
On USD IG as well as both EUR and USD HY, we are more prudent. These segments appear somewhat less strong from a fundamental and macro perspective, and we think that if vulnerabilities begin to be priced into credit spreads, these segments will be the first affected. It is too soon to become outright negative, as risk appetite is clearly still present in the market, but prudent issuer and sector selection are key. We have a clear preference for defensive sectors.
We maintain a negative view on the US dollar, driven by concerns over Fed independence and downside risks to the US economy. Our positioning reflects this view: we are long EUR versus USD and short USD against select emerging market currencies. In line with our rates outlook, we hold opposing positions on GBP and CAD, remaining long CAD and short GBP. Our short GBP position can also act as a hedge against long rates exposure, given budgetary risks.
Our long JPY position has underperformed, but we see potential for the Bank of Japan to hike rates, with market pricing indicating a 40% probability of a December move. We do not exclude this outcome, which would be supportive for the yen. Additionally, intervention remains a possibility given recent currency moves. The political backdrop is also relevant: the new administration favours a stronger yen, and tariff discussions have taken on a more positive tone. Tactically, we are long SEK versus short NOK, supported by improving Swedish economic data and the Riksbank’s recent rate cut, which has bolstered growth.
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