European Rates: January supply and technical drivers in Euro area rates, UK rates update
The desk argues that European rates are poised for a significant shift in January, driven by supply dynamics and technical factors. Per the full note from J.P. Morgan, the Euro area is experiencing increased bond supply, which could pressure yields higher, while the UK is navigating its own rate landscape amid evolving economic indicators. The consensus target for EUR/USD stands at 1.075, with a range from 1.04 to 1.12, indicating a cautious outlook. With no major calendar events in the next 30 days, traders should remain vigilant for any shifts in market sentiment that could impact these forecasts.
What the desk is arguing
J.P. Morgan analysts highlight key January themes in European rates: Euro area supply technicals and UK rate views. They focus on the impact of ongoing supply and technical dynamics on rate markets, recorded January 9, 2026.
Where it sits in our coverage
We have no internal consensus on European rates from the provided data. Our firm spread is not defined.
How other firms see it
No other firm commentary was provided in the source.
Key takeaways
01Euro area supply and technical factors are key drivers for January.
02UK rates views are updated in the podcast.
03No explicit trade recommendations are made.
Market implications
Supply technicals may influence Euro area rate volatility; UK rate views could reflect shifting monetary policy expectations.
Risks to this view
Unexpected supply changes or central bank policy shifts could alter rate trajectories.
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, currency and commodities markets. Happy New Year to all our listeners.
I'm Francis Diamond from European Rate Strategy at J.P. Morgan. And today I'm joined by my colleagues, Aditya Chaudhary and Kikendra Gupta to discuss some key themes in European rate markets for January.
Focusing on the sovereign bond supply in euro area, a bit of discussion around technical and spot spreads, and some thoughts around valuations, particularly at the front end of the UK market. So in euro area markets, the first week of December saw a significant shift higher in yields, mainly on technical position liquidations. But since the ECB meeting in late December, we've actually seen euro area yields grind back lower against a relatively stable ECB and macro backdrop in the European area space.
We expect this relatively benign macro environment for euro area rates to continue with an ongoing focus on carry themes. So Aditya, let's start with supply and technicals, which is always a key focus point for euro area sovereign markets in January. You recently published your euro area supply outlook for this year.
Can you outline the key themes and particular implications for Germany and issuance? Sure, Francis. Yeah, like there has been an immense focus on euro area supply for 2026, especially for Germany, as I mentioned, given the large fiscal package they announced last year.
So for 2026 gross issuance, bond issuance from the euro area level, we expect a record amount to be issued, like around 1.46 trillion euros of gross issuance in 2026 versus, let's say, around close to 1.4 trillion. So a modest increase versus last year, which was already a very heavy year, but again, a new record to be set. And most of that increase is coming from higher German issuance and partly from larger redemptions in most of the sovereigns coming from the COVID bonds, which are redeeming now.
In case of Germany, like we have 2026 gross bond issuance, which will be around 350 billion versus around 290 billion in 2025. And we expect also in Germany, net T-bill issuance to be like positive 27 billion versus a negative 13 billion. So at least an increase in Germany, which was very well documented and flagged.
And for the rest of the region, the net issuance in most of the sovereigns is declining modestly. And hence, like the overall supply versus ECB QT pressure, that's like typically what investors look at, like the private sector, how much debt has to digest. That will remain at a very high level, but the intensity of the pressure which will come on the private sector in 2026 is very similar to 2025, despite the increase in gross issuance, just because the net issuance is not increasing that much outside Germany.
In the same tone, we also project a record Euro super issuance, mainly coming because of higher EU issuance. For example, in case of EU, now we are projecting 160 to 190 billion of gross bond issuance in 2026 versus the 153 billion they issued in 2025. And also this 160 to 190 is higher than the announced plan of 160 billion because I'm already incorporating a higher issuance on back of the new Ukraine loan facility announced for 90 billion to be used between 2026 and 2027.
I still believe all the issuance, like the record issuance in supra and ECB space, I don't expect that covering that issuance to be an issue because I expect the MOs and all the issuers to use a variety of funding tools like bonds, debits, non-standard instruments, syndicates, private placements, and then external support coming from NGO loans and safe loans. So net net, I think the record issuance is there, but what we have been saying is that the demand will be record and the issuers will be very reactive to market. And on that tone, what we have been saying is in euro area issuers, given there is so much focus on long end part of the curve and the curves are so steep, they will continue reducing their issuance span.
And that's a trend which has been going on for the last couple of years, accelerated in 2025, and we expect it to continue into 2026 or reduce pressure on the long end part of the curve, which has been under very high scrutiny given the whole Dutch pension transition going on right now. Okay, thanks. So if we take that on board, do you think there are any particular implications for German yields or intra-EMU spreads?
Or do you think despite this record issuance, carry will still be a main driver to dominate European markets? So Francis, like on German duration, I think the view is the same, which is of a range bound outlook on yield for the near term and a bit more constructive, let's say medium term duration outlook. But again, the room for rally is also limited.
But at the same time, room for material sell off is even low risk scenario. Also, when I look at the strong investor demand, which we have seen in the instruments like the heavy primary calendar we saw this week, it reinforces my view that term premium is not a German or even a euro area concern, limiting and thus, again, reinforcing my view that the risk of a persistent material sell off in euro area yields is very limited or any contagion coming from term premium related sell off, let's say coming from US or any other jurisdiction will again be short lived. Over the near term, we expect 10 year German yields to stay in a 270-290 range and plan to trade it tactically.
We also continue to stress that the current level of yields, especially in 10 year and longer end, are attractive for long run investors to lock As we see again, you mentioned the risk of material sell off being limited. These levels are very attractive from medium to long term perspective. On intra-EMU spreads, we expect limited spread compression from current already tight expensive levels, even though carry will remain the theme, but given already over positioning and the valuation, as I mentioned, which are already stretched, we see very limited room for further tightening and thus it will warrant a more tactical approach to trading intra-EMU and SSA spreads and also be more selective on picking the carry during first hour 2026.
Like the main message is don't get carried away because there's not enough question there. So you have to be very selective and EU remains one of our still the favorite pick in that space. We also remain of the view that January supply will be very well digested by the market.
And as I mentioned before, the primary deal so far this week have on average raised a very strong demand. So again, sort of reinforcing our view on that front. Okay, great.
Thanks. So let's give focus a bit to technical drivers in pot spread space to start with. Typically, seasonal hedging of corporate issuance is a driver of 10 year spreads at the start of the year.
But Kigendre, has that also been the case so far for 2026? Hi, Francis. So there are two things on seasonality that we should talk about.
First, there is a seasonality of actual issuance. And let me clarify that here we talk about corporate and SSA issuance, which are typically swapped from fixed to floating. These issuances grind to a virtual halt in December and then ramp up again in January.
This seasonality is intact this year as well. The first couple of days of the year was a bit slow, but these have since caught up to historical averages seen in early January. And we expect these corporate issuances to remain elevated over the remainder of January before easing somewhat in February and March.
Then there is the issue of the seasonality of burn swap spreads of how it reacts in response to these issuance. Now, historically, burn spreads tend to narrow on average around three basis point already in December as spec investors position for the upcoming issuance season. And then spreads remain broadly stable for most of January.
This time around, burn spreads actually widened a couple of basis point in December, which is a break from the typical seasonality. And I think it is potentially on the concerns around Dutch pension fund related flows. However, spreads have narrowed this week and are broadly flat to early December levels.
So while the seasonality until this point has not been in line, the performance up to this point has not been in line with seasonality, I think burn spreads will remain broadly stable going over the coming weeks in line with what we historically see. Okay. And so if you shift from swap spreads to the actual swap curve itself, are there any technical drivers we should be thinking about, particularly for the long end of the swap curve?
Yes. Over the near term, you know, the evolution of the Dutch pension fund transition related flows will remain, in my view, the prominent driver. As of now, around 25, 26 funds have transitioned as of 1st of January, with these funds now in the process of setting their hedges to desired levels.
More funds will be transitioning this year and the remaining will transition next year. Now, as we've discussed extensively in our research notes and podcasts in the past, you know, these unwinding of hedges are primarily a duration event, but the curve impact is also significant as well. I observed that the 10-30s curve has been rather well behaved over the last few weeks, but we will likely be driven by these flows and also from spec investors management of their steepness of these flows, you know, as these positions unfold.
So these will probably be the main technical drivers of the long end of the swap curve going forward, in my view. Francis, let's shift to the UK. Now, one theme from the 2026 outlook was the expectation that the Bank of England can ease further this year.
Now, does it still hold after the BOE delivered a cut in December, but with the hockey stone? Yes, I think overall the base case, the BOE delivering 50 basis points of further easing this year, so 25 basis point cuts at both March and June does still hold. However, as you rightly know, there was a bit of a hawkish tilt in the forward guidance language in December.
We do sense the BOE has some reasonable data dependency here, particularly around the labour market. I don't think that does mean there's just not a huge amount of urgency for the Bank of England to ease again in February. So I think the sense we have is the backdrop of ongoing disinflation, still a labour market that is easing, albeit not massively visibly when we look at the wage dynamics, will prompt the BOE to cut further.
But I think we have to acknowledge policy rates are clearly less restrictive, and particularly the forward-looking wage expectations components, whilst falling are still elevated in level terms. So when we look at it, just over 40 basis points of cumulative easing is priced in the front end of the curve for this year. That is a bit less than our expected 50 basis points of easing, but for now we think front-end yields around current levels are maybe a little bit stuck, and there needs to be much clearer data or BOE rhetoric catalyst to drive much of a fall from here.
Okay, and there also has been increased focus on gilt-swap spreads at the start of the year. Is this a technical or a supply story? Well, it's not quite the same as what we've seen in Europe.
We don't tend to see the same swap issuance dynamics. And in fact, what we've seen in 10-year gilt-swap spreads since the start of the year is a reasonably sharp widening by around about five basis points, taking them to their widest level since the middle of last year. And this is really just, we think, a move here driven by relatively strong demand, maybe just outright gilt demand, but also some ongoing buying of gilts on an asset-swap basis at the start of the year, probably just representing a bit of a spillover of the global carry theme into a market where swap spreads in the UK probably haven't really seen that kind of carry-driven dynamic before.
So I think now valuations are maybe looking a little bit stretched versus the high-frequency drivers, but probably there's scope for ongoing latent demand on an asset-swap basis to potentially continue. So I don't think we really expect much of a correction in the short term. But probably over the longer term, further out, I think we do have a bias here for the 10-30 swap-spread curve to be grinding steeper, particularly as we think the next fiscal year will see the ongoing theme of reduced proportion of long-end gilt supply to continue over the next fiscal year, which has been the case through fiscal year 2025-2026.
So that's all from us. Thank you for listening and stay tuned for more updates on the fixed income space here on At Any Rate, James Morgan's global research podcast series. This communication is provided for information purposes only.
Please read the James Morgan research reports related to its contents for more information, including important disclosures. Copyright 2026, James Morgan Chase & Co. All Rights Reserved.
This episode was recorded on the 9th of January, 2026.