European Rates: Less keen on carry, UK political noise but no signal
The desk's current thesis emphasizes a cautious approach to Euro area rates, highlighting limited opportunities for carry trades amid rising political uncertainty in the UK. Per the full note from J.P. Morgan, the commentary reflects a broader sentiment that traders should be wary of the prevailing conditions as they navigate the market landscape. With no imminent high-impact events on the calendar, traders may need to rely on macroeconomic indicators and political developments to gauge market direction. The desk underscores that the political noise in the UK could have ripple effects across European markets, particularly in the context of rate expectations.
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.
Key takeaways
- 01Euro area carry trades offer limited opportunities; selective approach advised.
- 02UK political noise is elevated but lacks a clear signal for rate markets.
- 03JPMorgan recommends caution on adding directional exposure based on UK politics.
Market implications
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.
Risks to this view
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.
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.
Sources & References
How we cover this story