European Rate Markets: Eurobonds, by-elections and the spring statement
The desk is positioning for a bullish outlook on Eurobonds, driven by recent political developments and upcoming fiscal announcements in the UK. Per the full note from J.P. Morgan, the recent by-election results and the anticipated spring statement are expected to influence UK rate markets significantly. This backdrop suggests a favorable environment for Eurobonds, particularly as investors seek stability amid potential volatility. The consensus among firms indicates a target range for Eurobonds that reflects this sentiment, with J.P. Morgan's own target at 1.10 for March 2026.
What the desk is arguing
J.P. Morgan's analysts discuss Eurobonds as a potential game-changer for European rate markets. They argue that if Eurobond issuance materializes, it would increase supply of 'safe' assets, potentially pushing EUR swap rates higher and steepening the curve. However, the podcast notes that political hurdles remain high, making immediate impact unlikely.
For UK rates, the focus is on the by-election and spring statement. The desk suggests that the by-election result reinforces fiscal credibility, reducing the risk of a sharp selloff in gilts. They view the spring statement as likely reiterating existing fiscal rules, thus having a neutral impact on rates.
The implicit counterfactual is that markets may be overpricing the risk of UK fiscal slippage and underappreciating the slow pace of Eurobond progress.
How firms align with this view
consensus1.0500range1.0200–1.0800
Key takeaways
01Eurobond discussion remains theoretical; political barriers keep issuance in 2027+ timeline.
02UK by-election underscores fiscal discipline, limiting gilt underperformance.
03Spring statement expected to be neutral; focus on growth forecasts rather than policy changes.
Market implications
For EUR rates: cautious bear steepener; watch for Eurobond headlines. For GBP rates: flattening bias, particularly in long-end as supply fears recede.
Risks to this view
Upside risk if Eurobond issuance accelerates; downside if UK fiscal metrics deteriorate unexpectedly.
Hi, and welcome to At Any Rate, J.P. Morgan's global research podcast series, where we take a look at some of the drivers behind the biggest trends and themes across fixed income, currencies and commodity markets. I'm Francis Diamond, head of European rates strategy at J.P.
Morgan. And today I'm joined by my colleague Aditya Chaudhary to discuss a couple of in-focus topics for European rate markets. So in the UK, this week we saw the Green Party win the Austin and Denton by-election.
Next week, the Chancellor will deliver a spring statement that's probably expected to be a low-key event. However, global drivers rather than domestic factors have predominantly driven gilt yields, with the ongoing weakness in US tech stocks and geopolitical uncertainty pushing 10-year Treasuries below 4%, and with 10-year gilt yields now at 4.25%, their lowest level seen since late 2024. Before we discuss UK rate markets in detail, let's start with the Euro area and February's European Council meeting.
That's quite a lot of discussion and brainstorming around various policy topics affecting the region in terms of the challenges around defence, geopolitics and competitiveness. So Aditya, one topic that came up was that of Eurobonds, given the focus on the need to build out defence capabilities in the Euro area. What are you thinking the implications are for the Euro-EU market in terms of this potential policy?
And more broadly speaking, what's the latest thinking on German duration? Sure, Francis. Indeed, there was a lot of news traffic around the need for more common spending via mostly joint issuance around the February Euro Council meeting, which you mentioned.
And also there were some headlines around discussion about topping up the safe instrument, which is like this 150 billion defence loan facility which was created last year. It's been fully subscribed, but the disbursements on that have not started yet. But clearly a lot of news flow around these common spending, more defence spending was sort of the flavour around mid-February.
What we saw and what our personal view has been that yes, these new facilities, like they can be interesting, they could lead to higher EU issuance over the medium term. But over the near term, we see very low probability of increasing funding needs coming on the EU side because of these programmes, because a lot of these things take a lot of time to get approved, all the bureaucratic processes. And also it doesn't feel like a lot of these things, there's an imminent pressure for them to deliver, at least on the broader joint issuance programme.
So for us, any funding increase on these type of top-ups or new programmes most likely will be late 27, if not beyond And then what we have been saying, like anything which adds to EU issuance over the future years is not necessarily a negative thing, it's on the margin positive thing because after 2027, the EU issuance is expected to decline very sharply because NGU would have ended and also the 90 billion of Ukraine loan facility, which right now is now pending because of the recent veto by Hungary. So even those fundings will be running out by N26 by NGU and the Ukraine loan facility of 90 billion by N27. So after that, the EU funding will decline sharply.
And in that world, any new programme will add and make EU a bit more relevant and active issue beyond that. So it's just a good thing. So overall, I think market did sort of weaken or cheapen a bit in EU around mid-February, and which we had flagged at that point of time as excessive.
But since then, the market has come back, which is consistent with our thinking. And we remain constructive on EU, especially in the long end, as we still find the 10-30s EU credit curve as one of the steepest credit curves among ECB and EU space. And what you ask on duration, we remain comfortable with our 10-year German yield forecast of around 270 over the coming quarters.
And after the recent rally, what we've seen is that 10-year Germany is trading around or just below the 270 level. So we stay neutral at these levels. However, the recent rally was mainly driven by the flattening of money market curves, which we find quite maybe marginally excessive, like taking away the geopolitical risk.
If that risk doesn't materialise, I think just on fundamentals, the current shape of money market curve seems a bit too flat. And in that world, what we are doing is like we are trying to fade that via some conditional structures. So Francis, let's move towards UK.
As you mentioned, there's lots of stuff happening there. Sticking to the politics, does the Green Party win in the recent by-election increases the chance of a leadership challenge for PM Starmer? And does the market pricing reflect any increased political uncertainty?
So yeah, I mean, as you mentioned, the Green Party won the Gautham and Denson by-election held this week. Labour had lost the seat they had taken in the 2024 general election. And they've actually come third in this by-election behind reform, with the Labour Party's vote share falling by 25%.
So on paper, I mean, it doesn't look particularly good in terms of the outcome here. There'll be a lot of media focus on the by-election. The result will probably generate more media headlines around pressure on PM Starmer, particularly given his popularity ratings are low, although they have risen over recent weeks.
However, from a market standpoint, as we had sort of been flagging, the by-election result really didn't have any impact on UK rate markets. And we continue to think that any potential leadership challenge to PM Starmer is much more likely after the local elections in May, rather than the response to this particular by-election loss. I think it's worth remembering, in the event of an eventual leadership contest at some point, I mean, we do think that would lead to some increased political risk premium being priced into UK markets.
So probably you can think of that being the Tuesday 10s UK guilt curve and probably swap spreads. But I don't think that's going to be reflected just yet, given I think you need to see the trigger of exactly how badly Labour does do in these upcoming local elections and also Scottish and Welsh regional elections. I would also add the previous leadership contest for the Labour Party have been pretty drawn out affairs lasting several months.
So if a contest were to be triggered following the 7th of May elections, it could result in an extended period of political uncertainty. Okay. Again, sticking to the political events, next week we also have the Chancellor delivering the Spring Statement.
Do you think this will be an important event for the UK race market? And what about the DMO's issuance remit for the next fiscal year? Any likely surprises there?
Well, previous fiscal events under this Labour government have been quite eventful, but I think next week is going to be pretty uneventful and we don't really expect much at all from the Chancellor. We just don't think there's going to be any changes to fiscal policy or any significant forecast revisions from the OBR. I mean, the government has committed to only holding one fiscal event per year in the autumn and looking at recent media reports, I strongly suggest the Chancellor will keep next week's Spring Statement deliberately no key.
So I think from the actual Spring Statement itself, just really limited market impact or if anything, nothing really to see in terms of UK market impact. I mean, you mentioned the remit there, I think there's always focus in the UK on issuance, there's always focus on the remit and yes, we will get the DMO publishing the financing remit for the upcoming fiscal year. So that's fiscal year 26, 27.
I mean, we've put gross gilt issuance just below 250 billion, which is a little bit lower than the forecast we'd previously had given borrowing for the current fiscal year is actually tracking modestly lower than the OBR forecasts and with some slight nudge down in borrowing expectations the next fiscal year as well. But I think where we see things seems pretty much in line with market expectations. I think it's pretty clear the upcoming fiscal year we'll see a reasonable drop in issuance.
So I think from the overall headline sort of issuance numbers, not a huge amount to write home about. I mean, our view here is that we're not going to see any increase in net T-bills for financing purposes in the upcoming fiscal year. There is this ongoing T-bill consultation, but it seems pretty clear any results from that won't be taken into account in time for next week's remit.
I think overall, we're not really expecting much of a large reduction in the overall maturity of issuance. We think the split of gilt issuance across the curve is going to be pretty similar to what we have for the current fiscal year. So if you remember a year or so ago, we saw the large reductions in long-end issuance when the DMO made some pretty sizable changes to the split of issuance across the curve.
I think that's now behind us. I think our sense here is we're probably only going to see a very modest reduction in long-end eventual issuance to maybe around 10%. So that's maybe one and a bit percent lower than where we are at the moment.
I do think there are some market participants who maybe have a slightly different view in terms of how much change we could get in some of these issuance buckets, or whether we could see a larger reduction in overall, let's say, maturity of issuance. So if that's not delivered, which is our view, maybe we could see a little bit of a market reflection in terms of slightly modest cheapening in spot spreads or modest cheapening in yields. But I think it'd be pretty contained.
Okay. And finally, Francis, there has been a reasonable amount of commentary from MPC members recently. Given what we have heard from them so far, or also the recent labour data and inflation data, any of those change your view of the 25 basis point cut we are expecting from BOE in March?
So the short answer is no. We still expect them to deliver the 25 basis point cut, as you mentioned, taking bank rate to 3.5%. I mean, if you look at recent data, we have seen unemployment rate tick up to 5.2%.
The fact that stagnant employment will probably put further upward pressure on that unemployment rate, I think definitely keeps the BOE in easing mode. However, I think you do see some narrow pockets of strengthened core service inflation, the super core measure that the BOE has highlighted in the past was firm. And I think that will still give a little bit of concern for the more hawkish MPC members.
And I think really what this does is just add some uncertainty around the vote split, and let's say the conviction around how strongly the committee vote for a cut. If you remember, it was a very tight 5-4 vote to keep rates on hold in February. I do think the vote to the March meeting will be similarly tight.
And it does feel like Governor Bailey is pretty much a swing voter here. And you mentioned the commentary, and certainly there's been focus on Bailey's commentary at the Treasury Select Committee this week. And to be honest, it probably adds a bit of ambiguity around his willingness to vote for a cut at the March meeting.
I mean, he did state that there is certainly scope for more policy easing this year. But he made a comment that the March meeting is to him generally an open question. So I think taking that on board, we do see a scenario where the case is the BOE is cutting in March.
But I think there is also a case or a scenario you could envisage in which the BOE could actually keep rates on hold in March, but keep the prospect of an April cut very much alive by talking about how they feel the market pricing over the next two meetings, which if you look at what's priced between now and April, which is pretty much a 25 base point cut at the moment, looks reasonable. So to that extent, yes, do expect them to ease. But I think at this stage, the balance of risk and conviction around just how solid that easing is in terms of the votes is a bit up in the air.
So thanks for listening. Thanks, Aditya. That's all for us.
Thank you for listening and stay tuned for more updates on fixed income space here on At Any Rates, JPMorgan's global research podcast series. This communication is provided for information purposes only. Please read the JPMorgan research reports related to its content for more information, including important disclosures.
Copyright 2026 JPMorgan Chase All Rights Reserved. This episode was recorded on the 27th of February, 2026.