We move our view on US duration from neutral to a modest positive grade, implemented through the front end of the curve. This is the first time we are taking a long view on nominal rates this year, and this follows a period in which we have deliberately waited for the sell-off to create a more attractive entry point. In our view, the main support comes from valuations, where we see a meaningful overshoot. Markets are pricing[1] a Fed hike before the end of the year, which we see as exaggerated. Monetary policy is not obviously accommodative even now. The energy squeeze may prove less damaging than feared even if the Strait of Hormuz remains closed, as a combination of some demand pullback (especially in Asia) and increased production (especially in the Americas and Sub-Saharan Africa) is buffering some of the impact. The previous bumper jobs report was driven to a large extent by the hospitality industry in connection with the football World Cup. Wage growth is still below headline CPI, which points to workers’ relative lack of bargaining power and hence still some slack in the labour market. This will also reassure the Fed that the risk of a wage-price spiral remains limited.
There are clearly still reasons for prudence, however – especially at longer tenors. US growth remains robust at the surface level. The probability of a recession has declined materially, economic surprises have improved, and forward-looking indicators such as ISM services and manufacturing are close to the upper end of their recent ranges. Inflation remains the key constraint. Beyond oil prices, AI is also proving inflationary, as infrastructure investment and software-related prices are already visible in the data. We therefore keep a positive bias towards US inflation protection, alongside our nominal duration view.
In terms of growth, we continue to monitor the consumer closely. A large part of current growth momentum is linked to artificial intelligence investment and infrastructure build-out, while real income growth has weakened and the savings rate has fallen. US consumers are also more exposed to equity market wealth effects than those in Europe. As long as employment remains resilient, this does not point to an imminent consumption shock, but it does leave the economy more vulnerable if equity market gains linked to technology and AI begin to unwind.
We maintain a modest positive bias on euro duration on the 10-year tenor. Bund yields marginally above 3%[2] still offer some value, especially in a scenario in which geopolitical tensions ease and oil prices retrace. Conversely, an adverse energy shock could push yields back towards recent highs, so the position remains measured.
The oil price remains the dominant driver of euro rates. In recent weeks, risky assets and non-core spreads have retraced more than German yields, leaving Bunds closer to an energy-spike scenario, while BTP-Bund spreads appear priced for a more benign outcome. This relative pricing reinforces our preference to express the view through core duration rather than through additional non-core spread risk. We prefer selective non-core exposure to some CEE eurozone members.
The growth signal has weakened further. PMIs and business-cycle indicators are moving in the wrong direction: recession risk has increased, and the divergence with the US in terms of surprises has widened. Manufacturing has been more resilient than services, but we interpret part of this as an inventory building effect rather than a clean sign of strong underlying demand. This deterioration is not extreme, but it is sufficiently visible for the ECB to take it into account over the next few meetings.
Inflation is moving in the opposite direction and keeps the front end more vulnerable. Reflation risks are rising, headline inflation is above 3%[3], and core inflation is now also showing signs of renewed upward pressure. We believe that a June ECB hike is effectively a done deal. Beyond that, we expect the Governing Council to remain vigilant and “data dependent”. A second hike in September is possible, but with limited need to go materially further unless the energy shock intensifies. June projections will therefore be important. We expect upward revisions to headline and core inflation and downward revisions to growth.
Australia remains our clearest developed-market duration conviction. Australia macro data is beginning to show the deterioration we expected after the recent tightening cycle. The Australian economy is particularly sensitive to changes in policy rates because of the importance of variable rate mortgages, which makes the pass through of tighter policy relatively fast.
The market still prices some additional tightening by the Reserve Bank of Australia, and one further hike cannot be excluded in the near term. However, we do not see evidence that inflation is accelerating in a way that would justify a more aggressive path. This keeps the risk-reward favourable for Australian duration against other developed markets where either growth is more resilient or fiscal and inflation uncertainty are more difficult to absorb.
We maintain a broadly neutral to mildly constructive stance on emerging market debt, with EM FX still the preferred positive expression. Risk appetite remains strong for the asset class. YTD performance continues to highlight the resilience of high yield sovereigns, as returns have been driven not only by carry but also spread compression. Even the recent EM FX underperformance was ultimately about a strong dollar rather than EM weakness, and G10 currencies also underperformed against the USD.
Absolute hard currency valuations are now less compelling. Spreads have tightened to very low levels, close to levels last seen before previous late-cycle periods, and the improvement in yield levels has been driven partly by spread compression that leaves less room for further capital gains. This argues against adding broad hard-currency beta, particularly given that the adverse geopolitical scenario is not fully priced.
Technicals remain the main source of support. Inflows have resumed after the March interruption, cumulative positioning has not yet recovered the outflows of previous years, and the summer period should bring lighter supply. Relative value also remains more attractive versus US credit, especially in high yield, while EM corporate fundamentals continue to improve and still offer a meaningful pickup versus DM corporate credit.
We are more cautious on local rates, where several markets have sold off and Asian central banks remain under pressure, as illustrated by Indonesia. The level of dispersion between regions is high. We prefer local currency exposure and EM FX where real yields, carry-to-volatility and policy credibility remain supportive. In practice, many of these opportunities are concentrated in Latam.
We trim but retain our short view on the US dollar. The dollar strengthened over the month in two distinct spurts: first after firmer CPI and PPI prints, and then after the strong payrolls report. This move was broad-based, with most DM and EM currencies weakening in relative terms.
This does not mean that we have turned structurally positive on the dollar. Our longer term view remains that the dollar is likely to weaken if front-end Fed hikes are priced out, but the near-term asymmetry is less attractive than it was.
In our view, the euro is no longer the cleanest way to express the weaker dollar theme. European growth data remain fragile, and the market has increasingly preferred higher-carry or more risk-sensitive currencies when dollar pressure eases. We therefore keep the dollar short smaller and more selective, while retaining EM currency exposure through the Brazilian real and Mexican peso, where carry and carry-to-volatility remain compelling.
Within other developed markets, the yen remains structurally attractive, helped by the improvement in valuation and by the potential for Bank of Japan normalisation if energy market tensions ease.
Our views on both high yield and investment grade credit remain unchanged. Our reasoning remains centred on valuation, fundamentals and sector dispersion. Spreads are close to multi-decade tights, but investment grade fundamentals are improving, while high yield fundamentals continue to deteriorate.
This argues for a continued preference for larger issuers with stronger balance sheets and better pricing power. Sector-specific risks remain visible in areas such as autos, software and food and beverage, and the geopolitical backdrop adds another source of potential volatility through oil prices and risk sentiment. We therefore continue to prefer capturing yield through higher quality credit rather than increasing exposure to lower rated spread beta.
High yield remains less attractive. Valuations are not sufficiently cheap to compensate for weakening fundamentals, sector pressure and refinancing needs. We would need either more attractive spread levels or clearer evidence that fundamentals are stabilising before becoming more constructive. The decompression trade between investment grade and high yield remains appropriate in the current environment.
The main change is in convertibles, where we move US dollar convertibles to negative while keeping euro convertibles neutral. The US market has high exposure to semiconductors and to issuers whose valuations and equity sensitivity have become stretched after exceptional performance. With deltas elevated and some securities having rallied extremely strongly, we prefer to reduce exposure to this part of the market until valuations offer a more balanced entry point.
[1] Based on Overnight Index Swap as of 9/6/2026. Source: Bloomberg
[2] 3.04% on DBR 2.9 02/15/36 as of 9/6/2026. Source: Bloomberg.
[3] Source: Bloomberg, 31/5/2026
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