What's takeaway 1 on European Rates?

Euro area carry trades offer limited opportunities; selective approach advised.

What's takeaway 2 on European Rates?

UK political noise is elevated but lacks a clear signal for rate markets.

What are the market implications for European Rates?

Limited carry may reduce demand for peripheral Euro area bonds, potentially widening spreads versus core. UK gilt yields may remain range-bound as markets wait for concrete policy signals. Overall, the view supports a flattening bias in EUR rates and a neutral stance on GBP rates until clarity emerges.

What are the risks to this view on European Rates?

If UK political noise crystallizes into a clear policy shift (e.g., fiscal expansion), gilt yields could spike, challenging the no-signal view. Conversely, if Euro area inflation surprises higher, selective carry trades could become more attractive, undermining the cautious stance.

European Rates: Less keen on carry, UK political noise but no signal

What the desk is arguing

The JPMorgan European Rates podcast, recorded 23 January 2026, revisits the theme of limited selective carry in Euro area rates. The authors, Francis Diamond and Aditya Chordia, note that carry opportunities are constrained, suggesting a cautious approach to positioning for yield in the region.

Separately, they highlight increased political noise in the UK this week, but emphasize there is no clear signal for rate markets. The implication is that investors should not read too much into near-term political developments for trading direction.

The desk implicitly rejects the notion that UK political noise provides a tradable catalyst or that Euro area carry trades are broadly attractive. Instead, they advise a selective, possibly defensive stance.

Hi, and welcome to At Any Rate, JPMorgan'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 JPMorgan. And today I'm joined by my colleague Aditya Chaudhary to revisit the theme of selective carry in Euro area rate markets, as well as some of the recent political noise in the UK and the impact on intermediate yields.

One of the key themes we'd highlighted in our 2026 outlook was the idea of selectively seeking carry in Euro area rates, particularly in intra-EMU spreads. However, since the start of this year, spreads have tightened despite large front loaded supply. So Aditya, if we look at the tightening over the recent weeks, do you still subscribe to this carry theme?

Or are you starting to think it's looking a bit like a carry trap here? Hey, Francis. Yeah, clearly we are getting a bit nervous or cautious here on carry.

Like when we wrote our outlook in 2026 outlook in November, we said that we expected carry to remain the name of the game for intra-EMU spreads for all one first half of 2026. And the drivers were pretty much the contained macro monetary policy volatility, good growth outlook, ongoing private sector demand for EGBs, offsetting the elevated supply QT pressures and limited political risks in Euro area, including France. All these factors still hold true.

The only thing which has happened, the volatility has become even more expensive. And even in the outlook, we had stressed that even at that point of time, the spreads were already trading tight or expensive in some of our fair value models. So we had argued for a tactical approach to trading intra-EMU and SSA spreads and to be selective in picking carry.

And since then, the spreads have again modestly tightened. And also given what we have seen over the, since the start of the year, but increasingly over the past week, the whole geopolitical tensions, the U.S. policy uncertainty, like we are now turning a bit more cautious on carry exposures. Because at current valuations, the spread carry is not providing sufficient question against any potential risk of widening risks, especially given the already crowded positioning.

Like when we look at the client service, we are screening at some of the highest over positioning in the past couple of years. What we also highlight that the large part of the improvement in risk-adjusted carry in intra-EMU and SSA spreads we have seen recently has been mainly driven due to the sharp decline in spread volatility. So even if the spreads are compressing, the risk-adjusted returns have improved because the volatility has declined significantly.

And what we have presented in our overview section this weekly is that even a one standard deviation move in intra-EMU spreads, a one standard deviation widening is more than enough to blow away one to two month worth of carry across various intra-EMU spread or SSA exposures. So you are running like the absolute carry or the return you're making to take these carry exposures is very limited. And with this heightened risk, I think you have to get a bit more cautious.

What we are also saying in our pieces is that you should have some attractive convex ways to protect your spread carry portfolios against any risk of widening moves. So, yeah, getting a bit more concerned and cautious. Again, no clear reason why it should widen, but you're not getting enough to take some of these volatility risks.

Okay, thanks. It does sound like area is becoming maybe a little bit of a trap, even though we don't have a clear sense of particular widening pressures. So given that, is there anything particularly interesting that still stands out to you in your area rates?

So the other thing which we are highlighting that the recent global geopolitical developments that also adds further conviction to our view of improving demand for EGBs and EU on gradual diversification away from the USD markets. So this sort of won't say utilization, but more like a diversification which benefits the non-US markets. And then when we look at the IMF COFA data and also like Eurozone balance of payment data, and we have presented that again in our weekly this week, we see clear trends of increasing Euro reserves and higher demand for international from international investors for EGB and EU paper.

So clearly that team was already in place since April last year. And I believe that the recent developments will further add to the conviction or acceleration of these type of trends in my view. So we believe and therefore we continue to stress that term premia is not a German or even a Euro area team and also expect the beta of Euro area rates to global rates, especially during the term premia related sell-off to remain quite muted or limited.

Similar to what we saw during this week when we saw a significant steepness in Japan and US, the moves in Euro area were quite muted. And the last thing we are highlighting in our pieces is that we find current level of yield, especially in the 10-year and longer sectors, quite attractive for long-term investors as we see low risk of material persistence sell-off from current levels given our view on term premia, not a Euro area story. So Francis, let's move to UK.

This week we saw an increased political noise which resulted in a modest sell-off in yields and underperformance on the intermediate sector of the curve. How do you think about this? What's happening there?

So you're referring to the media reports that the current Greater Manchester Mayor Andy Burnham could potentially be a Labour candidate for what might be a upcoming parliamentary by-election as the current MP in that seat appears to be standing down. So I guess listeners may be wondering why UK markets would react to that sort of news. But I think this is a reminder that there is still some degree of political uncertainty, particularly with the UK's fiscal position remaining an underlying theme that can periodically come and drive rate markets.

I think we've seen a bit of evidence of that this week. I think it's worth remembering ahead of the budget last November, one topic that markets and media were focused on was the possibility of a potential Labour leadership challenge and the mechanisms under which that could theoretically occur. And it's worth noting Andy Burnham, the current Greater Manchester Mayor, has been viewed by some market participants as a potential challenger, but he does face the difficulty that he's not currently a Labour MP.

So I think the news we saw this week did cause some market participants to view the prospect of an upcoming by-election as a route for Burnham to enter Parliament and hence drove some of this increased political risk premium in the curve. However, I think we'd point out that the process for Andy Burnham to be selected as a potential Labour parliamentary candidate is not straightforward, as he's currently the Mayor of Greater Manchester. And there are other obstacles and selection processes that would need to be gone through as well as his approval from the Labour NEC Committee to make his candidature approved.

So I think for now, it's too early to price any significant increased political risk premium around any potential challenges or Burnham-led challenges to the Labour Party leadership into the intermediate part of the Gilts curve. And I think we just need to get a lot more clarity on what might happen with this by-election over the coming days and weeks. So for now, we would look to tactically fade this recent modest increase in risk premium, although we do acknowledge that this risk premium theme will ebb and flow and potentially could well increase again as we get closer to the May local elections.

Well thank you Aditya and that's all from us. Thank you for listening and stay tuned for more updates on the 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 contents or information including important disclosures. Copyright 2026, JPMorgan Chase & Co, all rights reserved. This episode was recorded on the 23rd of January 2026.

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European Rates: Less keen on carry, UK political noise but no signal

What the desk is arguing

Sources & References

Primary source