We move US nominal duration back to neutral after the front-end overweight implemented last month. The main reason is the first FOMC meeting under Kevin Warsh and the market reaction that followed. The removal of forward guidance was interpreted as hawkish by the market. With the market now having settled on expectations of a hike, it will take a clear turnaround in either economic data, Fed rhetoric or both to change these expectations. Nonetheless, the dot plot still does not point to near-term tightening. Meanwhile, the five new task forces convened by Warsh may simply buy time before the Fed commits to a clearer direction.
Meanwhile, the macro backdrop argues for balance. US activity remains resilient, economic surprises are positive, PMIs are above 50 in manufacturing and close to 55 in services[1], and AI-linked investment continues to support growth. At the same time, real wages are flat, the savings rate is low, and the fall in unemployment partly reflects weaker participation. Inflation now clearly eclipses the labour market as the Fed’s foremost concern. As a result, we currently take a neutral stance on US nominal rates across the curve.
We still retain a positive bias on US real rates, although we trim the size of our conviction. The inflation-linked market needs to be read with some care. The apparent fall in very short-dated US breakevens over the month overstates the true move, because short-dated linkers are heavily affected by carry from realised inflation prints. On the April 2027 US breakeven, the pure yield differential suggested a decline of more than 120 basis points[2], but a performance-based comparison between the nominal bond and the inflation-linked bond points to a much smaller effective move, closer to 30 basis points. The front end has therefore mostly followed the decline in oil rather than clearly underperforming it.
The more meaningful signal is further out the inflation curve. Long-end breakevens have fallen more than oil alone would imply, which we interpret as the market granting some inflation credibility to the first Warsh Fed communication. This mechanically pushes real yields higher and leaves them at compelling levels. We continue to like real rates on a relative value basis but, reduce the size of our stance as further upside inflation risks seem more muted now.
We maintain a modest positive bias on euro duration, mainly through the 10-year part of the curve. The fall in oil prices has not fully translated into German rate performance. This partly reflects a mixed energy picture, with natural gas prices still elevated while the situation remains fragile in the Middle East, but also higher Japanese yields crowding out buyers of Euro debt. These factors have recently put some pressure on rates, but we are not convinced that the move is likely to continue materially further.
The eurozone economy remains weak overall. Recession probabilities are elevated, even if recent PMIs and economic surprises have improved, but they have not done so enough to bring either into clearly positive territory. Inflation risk remains present, but the dynamic is less concerning than during the 2022 energy shock. Second-round effects appear contained so far, headline and core inflation have surprised to the downside, and we may already have reached the peak in headline inflation. The ECB has delivered the June hike and is now likely to move more gradually. We still see scope for one additional hike in September, but one in July looks unlikely. Even hawkish members of the ECB have publicly advocated a more balanced approach since Sintra.
In addition to the outright position on the 10Y tenor, we also implemented a 10-30 steepener in the second half of June. We have seen some curve re-steepening following the significant bear flattening in the wake of the Iran war, but we are still quite some way from pre-war levels. The same structural pressures on the long end of the curve persist, however, and we have therefore re-implemented this structural long-term view.
In country allocation, we take an underweight view on France, implemented against Hungary (in EUR). We see a significant probability that France’s budget deficit will overshoot predictions this year, while political noise could also come back to the forefront. Hungary’s issue in EUR offers significant carry pickup, and we therefore see this as a carry-positive position that can provide downside protection in case of fiscal and political shocks in France.
Australia remains one of our clearest developed-market duration convictions. The Reserve Bank of Australia (“RBA”) delivered three hikes for a total of 75 basis points and is now signalling that the tightening cycle is being felt in consumption, housing and the labour market. Given the importance of variable-rate mortgages, policy pass-through should remain relatively fast. The market still prices a high probability of one additional RBA hike, but we think this can be removed if the data continue to reflect the impact of previous tightening.
We leave the emerging market debt scores unchanged. Fundamentals are still strong, but valuation is less straightforward. Hard-currency spreads are at multi-year tights, so the broad asset class is not cheap. Part of this tightening is justified by improving credit fundamentals, rating upgrades and defaulted countries moving back into rated benchmarks. The all-in yield remains the main argument for hard-currency exposure and continues to attract inflows.
Relative value remains more visible in high-yield hard currency than in investment grade. On the investment-grade side, it is difficult to argue that EM sovereigns are clearly more convincing than US credit. In high yield, tight US spreads and idiosyncratic dispersion still leave room for selected compression stories.
Technicals remain the main support. Inflows have stayed strong this year apart from the interruption around the Iran conflict, and summer should continue to be supportive with muted issuance. Local-currency debt is still convincing where real yields are high, although the dollar picture has become less straightforward under the new Fed chair. Dispersion across regions is high, so we prefer active, selective exposure through EM FX, local-currency carry and high-yield hard-currency stories rather than broad beta.
We retain a negative bias on the US dollar, but have trimmed the size of our underweights. The dollar continued to perform over the month of June, mainly because of the first Warsh FOMC and the market repricing towards a more hawkish Fed path. Most developed-market currencies weakened against the dollar. The yen also weakened, as the market again considered the probability of intervention above the 160 threshold.
We have reduced the dollar short because the near-term technical picture is less favourable. Important EUR/USD levels have been broken, and the change in Fed communication argues against keeping the same conviction through a simple euro-dollar expression. At the same time, we do not want to turn positive on the dollar. Positioning now looks very long dollars, and the market reaction to Warsh may have become too hawkish relative to what the Fed has actually signalled.
The yen remains the preferred developed-market expression. Potential Bank of Japan intervention, possible coordination with the US and the precedent of Treasury sales during previous interventions all make USD/JPY a preferred way to express a smaller dollar short. We have closed the long New Zealand dollar position and taken profit on the short Swiss franc.
In emerging market currencies, we remain constructive and have added exposure to the Indian rupee and Indonesian rupiah alongside existing carry-oriented positions. Positioning in EM FX is more stable than in the dollar, while carry and real-yield support remain compelling in selected markets. The FX scorecard remains a useful input, but not a direct allocation tool.
We make a material change in credit by moving euro investment grade from neutral to a positive grade. Euro HY also moves to a modest positive grade, while we also upgrade US HY, but remain underweight. AT1s, CoCos and convertibles are also more convincing, but the core of the view is the higher conviction on EUR investment grade.
The case for euro investment grade is, in roughly equal parts, structural and tactical. Structurally, the asset class continues to offer meaningful carry, with yields around the mid-3% area[3], and it has become a core part of fixed-income allocations. Fundamentals remain solid: rating drift is positive, upgrades still exceed downgrades, and the number of idiosyncratic disappointments has been limited. This does not remove the need for selectivity, but it means the asset class still offers a good balance between income, quality and resilience.
The tactical trigger is that several of the hurdles that kept us neutral have eased. The ECB tone has become more balanced since the June hike. Despite the recent renewed flaring up of tensions in the Strait of Hormuz, the crisis thus far has arguably proven less devastating than might have been initially expected. A combination of reduced demand from China, re-routing of Gulf flows, and increased production in the USA, Latam and West Africa has tempered some of the fallout. This matters for investment grade, because a more tempered monetary policy path should reduce rate volatility and refinancing uncertainty. Even at the peak of the geopolitical stress, euro investment grade did not suffer materially, which reinforces our confidence in its stability.
Technicals are also becoming more favourable. Supply was very heavy in the second quarter, and this led to some underperformance versus derivatives. We now expect issuance to decline over July and August, which should support cash bonds and help reverse part of the recent dislocation. Flows have also returned after temporary hesitation, so the combination of lower supply and better demand argues for a more positive stance through the summer.
We are explicitly not making a spread-tightening call. At current spread levels, the return profile should be driven primarily by carry rather than by a material compression of risk premia. The one-year breakeven cushion is substantial enough to absorb a meaningful widening scenario, while a move modestly tighter would be a helpful but not necessary source of performance. This is important: the overweight is not a risk-on trade, but a carry opportunity in a high-quality spread asset.
Implementation remains selective. We continue to favour banks, financials, utilities and defensive TMT exposure. Financials are supported by stronger balance sheets, improved capital ratios and compelling carry, while bank subordinated debt, AT1s and CoCos benefit from elevated income and supportive technicals. Utilities and defensive TMT offer a more resilient profile in a still uncertain macro environment. We remain more careful on sectors where disruption risk or earnings pressure is visible, including autos, software, and food and beverage.
Technology issuance deserves specific attention. The market absorbed the recent heavy supply reasonably well, but some secondary-market pressure was visible and we do not want to extrapolate that support too far. We expect less issuance pressure in July and August, which is helpful for the cash market, but the autumn supply picture is less clear. The reporting season also remains a risk, as profit warnings from individual issuers can still create dispersion even when the aggregate credit picture is solid.
Our upgrade of Euro HY is more tactical. Spreads have widened modestly back towards the one-year average and yields close to 6% are compelling. As in investment grade, cash bonds have underperformed derivatives because June supply was unusually heavy, creating a wider credit basis that should be supported as supply fades over the summer. This gives us a positive opportunity, but there are reasons to be prudent. Fundamentals are more fragile than in investment grade, many issuers are smaller, and vulnerable sectors are more heavily represented.
The preference for Europe is also important. In the US, High Yield valuations are much tighter, energy and shale exposure could underperform if oil stays lower, software and AI exposure is more volatile, and summer supply is heavier.
[1] Source: Bloomberg 30 June 2026
[2] Source: Bloomberg 2 July 2026
[3] Source: Bloomberg 7 July 2026
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