What's takeaway 1 on Global Rates 2026 Outlook?

J.P. Morgan released a 2026 global rates outlook for developed markets.

What's takeaway 2 on Global Rates 2026 Outlook?

The report covers rates, curves, swap spreads, and volatility.

What are the market implications for Global Rates 2026 Outlook?

Without explicit forecasts, the implications are unclear. The report's focus on developed market rates suggests attention to G10 central bank policies and potential curve trades, but no actionable guidance is provided.

What are the risks to this view on Global Rates 2026 Outlook?

Key risks include central bank policy surprises, inflation persistence, and geopolitical shocks that could alter rate expectations. The lack of specific projections limits risk assessment.

Global Rates 2026 Outlook

What the desk is arguing

J.P. Morgan's global rates strategists, led by Jay Barry, present a comprehensive 2026 outlook for developed markets, covering rate paths, curve steepening or flattening, swap spread behavior, and volatility trends. The discussion, recorded on November 25, 2025, likely incorporates views on central bank policy divergence and inflation dynamics, though specifics are limited to the podcast excerpt.

Where it sits in our coverage

We have no internal coverage data on the relevant currencies or rates for 2026, so we cannot provide a consensus or firm spread. This report is synthesized solely from the headline, lacking numerical targets or directional stance to anchor against.

How other firms see it

Given the absence of specific stances in the excerpt, we cannot cite other firms' views. The J.P. Morgan report itself is the primary input, but without rate projections or curve forecasts, comparison is not feasible.

You're listening to At Any Rate, J.P. Morgan's global research podcast, where we take a look at the story behind some of the biggest trends and themes in fixed income, currency and commodity markets today. I'm your host, Jay Barry, head of global rate strategy at J.P.

Morgan. With year end right around the corner, we in research naturally turn introspective, and our teams have just published our 2026 outlooks earlier today, both of which are available on J.P. Morgan markets.

So we think this is a good opportunity to give a high level overview of our core themes as we head into 2026. And with me today to discuss our year ahead outlooks are a group of senior strategists across U.S., European and U.K. rates. Today I'm joined by my colleagues Aditya Chordia, Francis Diamond, Kagendra Gupta, Ipek Ozil, Phoebe White and Teresa Ho to discuss the high level views on duration, curve, swap spreads and volatility as we look ahead to next year.

So if I can just set the stage with the U.S., we are projecting above trend 1.8 percent growth in 2026, similar to the outcome that we're likely to deliver this year. With the drags from the Liberation Day tariffs fading, policy supports from the big beautiful bill act supporting disposable income and further Fed easing also supporting continued easy financial conditions. But even though we expect the economy to run back above trend, this nascent weakness in the labor markets that appeared earlier this year will likely justify further Fed easing.

And we look for two more Fed cuts of 25 basis points apiece to bring the Fed funds target range down to 3.25 to 3.5 percent by the spring of next year. So maybe if I can begin on the U.S. and Phoebe, if I can turn to you first, given this backdrop, how are you looking at the overall outlook for Treasury yields and the curve in 2026? And to the extent that the Fed delivers about 100 basis points of easing, this looks more like a mid-cycle adjustment akin to other shallow easing cycles that we've seen over the last 30 years or so.

So how does this inform your view on rates? Sure, Jay. So as you said, we do expect further easing from the Fed, but only two more cuts in January and April as we think the next few months will deliver uncomfortably slow growth in employment.

But as we move into the year, with those macro supports kicking in that you mentioned, that should help stabilize labor markets. Inflation is likely to stay sticky, so we think the Fed will go on an extended hold after April. So what does that mean for markets?

Of course, this would be less easing than the markets currently have priced in. OIS markets are priced for a bit more than 90 basis points of easing by the end of next year. So certainly a shallower easing cycle should allow yields to move somewhat higher from here.

I think timing matters, though, and here we can look at how yields behaved around prior shallow easing cycles or mid-cycle adjustments. We can look at 1995-96, 2019, or even last year, 2024, and what we find is that the moves in yields varied in magnitude depending on each of those environments, but we find that yields bottomed one to two months before that final cut. So we think that means we could see yields trade somewhat range-bound over the next few months, especially at the front end of the curve, but then start to rebound higher as we approach the spring.

Along the curve, we think there's room for the belly to underperform. As the market implied, terminal rate starts to shift higher and some of that easing is taken out of the curve. Certainly over a longer horizon, we find that the performance of the five-year sector on the curve is very highly correlated with the money market curve.

So the three-month, three-month, one-year, one-year OIS curve in particular demonstrates a high correlation with that five-year sector performance. And on top of that, the five-year sector looks about six basis points rich versus the wings on this basis, so we think that suggests even greater potential for cheapening as the markets price in a less-stubbish path. And then lastly, in the intermediate to long-end part of the curve, I think a number of factors should limit the scope for yields to rise in the current environment, particularly as we see the supply-demand backdrop improving a bit in 2026.

And then putting the pieces together, we think that means 10-year yields are likely to rebound to around 425 at mid-year and 435 at year-end, so that's roughly 35 basis points higher than current levels. Broadly, we expect the curve to remain range-bound in the coming months with risks of flattening as we extend deeper into the first half of 26 and the belly underperforming along the curve. Thanks for that, Phoebe.

And if I could just dig in to one of your comments about the long-end of the curve, it seemed that term premium, whether we look at it through the lens of more academic measures or more empirical measures, had sharply risen from the second half of 2023 until earlier this year, but since then, it's actually stabilized and declined a bit. So what do you think has driven this retracement, and is it justified? Sure.

I think there are three main factors that have driven that retracement, and we do think it's generally justified. I think first is on the fiscal side. We think concerns around fiscal sustainability have receded in recent months, largely because markets are more comfortable that tariff revenue is running at a pace that should largely offset the reduction in tax revenue coming from the one big, beautiful bill.

On top of that, we think this means Treasury is likely to wait until November of 2026 before increasing coupon auction sizes once again. And with coupon maturities picking up next year, we see the net issuance mix shifting more towards bills. So that's more supportive.

Second, I think on the demand side, this shift in market composition away from price-insensitive buyers that we've been highlighting in recent years has started to stabilize in 2025. So the Fed, foreign investors, and U.S. banks, three investor groups we've generally highlighted as more price-insensitive, comprised around 75% of the Treasury market a decade ago. This year plummeted to about 50% by late last year.

But this year that share, again, started to stabilize, and it could even rise a bit modestly. We've had a slower pace of Fed runoff. Bank demand has continued to rebound, and foreign investors have been pretty strong buyers of fixed income in 2025.

And as we look ahead to next year, we don't expect to see demand shifting materially back to these investor groups, but the trend should remain positive. Of course, QT is set to come to an end next week on December 1st. And when that happens, the Fed will start buying T-bills as MBS paydowns continue, and we expect reserve management purchases in T-bills to begin in January.

And then third, concerns around Fed independence really came to the forefront earlier this year but have receded more recently. As we look to 2026, I think if the Supreme Court rules in favor of removing Lisa Cook, those fears could come back again. That could re-inject term premium further out the curve, but that's certainly not our base case.

And then one other risk to highlight is that if the Supreme Court strikes down IEPA tariffs in the next couple of months, I think that could temporarily kind of add uncertainty back to the fiscal outlook, but we think the administration would quickly replace those tariffs using alternative authorities. So in general, we think term premium is unlikely to rise significantly as we head into 2026. Thanks for that.

And I'd note that for all of our listeners that in our annual outlook survey, which has been published in the overview section of the U.S. Fixed Income Markets 2026 Outlook, it's notable that fiscal sustainability concerns are much further down the list in this year's survey than they were this time last year. And most participants seem to think that the Supreme Court will not follow through and allow Governor Cook to be fired.

So thanks for that, Phoebe. Now let's shift the conversation to Europe and Aditya, to you, where the ECB started cutting earlier and more aggressively than the Fed, but has now been on hold for nearly six months. And I think the general theme from President Lagarde and other governing council members have been that the bank is in a good place.

So in that context, what's your outlook for German yields next year? And given everything that Phoebe mentioned about term premium being less of a concern here in the U.S., is there anything we should note about the German fiscal boost and whether that may contribute to term premium there next year? Sure.

Thanks, Zae. Looking ahead to 2026, like the German yields in our outlook, we are expecting a pretty much a very broadly range-bound environment. Like what we are forecasting is 10-year German yields around 265 by mid-year and 275 by year-end.

So pretty much stuck in a 10, 15 basis point range. So it is a very good, comfortable place, to be honest, for carry. And here, like the ECB, as you mentioned, after cutting rates earlier and more aggressive than the Fed, is now expected to be firmly on hold at 2% for 2026 and even possibly 2027.

So given this policy stability, along with a very robust euro area growth outlook, where we expect euro area growth to be somewhere closer to one and three-quarter percentage points, and inflation, which is gradually declining and will settle somewhere around two or just below 2%, I think these are the key anchors for this range-bound, steady German yield outlook we have. On the curve, we expect the two-steps curve to continue exhibiting bull-flattening, bear-steepening dynamics with the overall curve shape staying around current levels given, again, the range-bound yield outlook we have. And we find the five- to 10-year sector as a sweet spot to own any duration exposures.

We also maintain a strategic overweight Germany versus US bias in the intermediate sectors given the diverging central bank narratives, as Phoebe has highlighted, where in the US we still have Fed being more active and the ECB here firmly on hold. And as you mentioned, finally, term premia. It is a topic, but to be honest, Europe is not a place, or Germany is not a place to look for it.

Despite Germany's sizable fiscal boost, it's not a major concern for us. Like German debt-to-GDP ratio will still remain well below other developed markets despite the higher spending. And also, when we look at the demand outlook, the strong private sector demand, especially from the foreign investors, could help us absorb the increased supply on back of this ongoing fiscal boost.

So overall, I think term premia is not going to be a concern. So again, very limited upside risk on German yields from these type of factors. So in summary, German yields should stay range-bound, and our bias will be to play duration tactically from the long side over 2026.

And term premia should remain quite well-contained despite the strong German fiscal boost. Thanks Aditya. Now, I think kind of to continue on the conversation in Europe, you had talked just there about carry.

It makes sense to talk about intra-EMU spreads and European SSA spreads. Is elevated supply a concern there? And then clearly political risks have been abundant in Europe, particularly in France last year and this year.

Should we be on the watch for anything there next year? Sure, Jay. So as you mentioned, like for our intra-EMU and SSA outlook, I think the main theme for 2026 is carry.

We expect spreads to stay, remain stable at current levels, like we are at sort of multi-year tides. But despite that, we believe there's limited room to tighten, but again, very limited risk to widen from here, given the global outlook which we have. And in that world, I think the carry will remain the name of the game in the first half of 2026.

And we expect some modest widening in the second half as we adjust the, as we expect the risk adjusted carry to start deteriorating as we go into 2027. And also potentially on back of some increasing political noise in France as we head into early 2027 presidential elections. As you highlighted, like elevated supply is always a factor mentioned around intra-EMU outlooks, where they say, okay, spread should be wider on the basis of that.

But we do expect supply to be at very elevated levels, but most of the increase is coming from Germany, versus the rest of the Euro area is on the margin, reducing their net supply or at best keeping it flat to 2025. And that being said, like we also expect the demand side to be very strong. As I mentioned in Germany, we expect similarly the private sector demand for EGB papers and also SSA papers, including EU to be quite robust.

And hence we don't expect significant widening pressure from the higher supply because of the robust demand outlook. Political risk, I think outside France, they are broadly contained in the Euro area. The focus will be in France, the approval of the 2026 budget near term.

If the 2026 budget passes without triggering a new election, which is our base case, we expect political tensions to ease for a while in France. However, as we approach the presidential elections in early 2027, French spreads could come under pressure in late 2026. Italy, again, people tend to focus on it from a political point of view, given the history, but we expect a very stable environment under the Maloney government for 2026.

We can see some period of volatility around the sort of 2027 budget approval process in late 2026, as Italy will have to do the budget without the recovery fund money because recovery fund is ending in end of 2026. So overall, we expect intra-EU and Euro SSA spreads to stay range bound in 1H26. Spain, Greece and EU are our favourite picks, and we prefer selective carry expressions partially offset against France.

That's great. Thanks, Aditya. So let's keep it moving and talk about the UK.

So Francis, the UK economy seems to be suffering from the same weakness in labour markets and somewhat stickier inflation that we heard Phoebe talk about with respect to the US and the Fed. But there's a little bit of a different story there with respect to both productivity and economic resilience. So we've recently changed our MPC forecast.

So can you talk about that and the outlook for UK rates into next year? Yeah. Thanks, Jay.

So certainly the Bank of England is still expected to continue a bit more modest easing. So we are not expecting a 25 basis point cut in December, and then two more 25 basis point reductions in March and June. So that'll bring bank rates to 3.25% by the middle of next year.

And yeah, as you mentioned, the outlook is certainly underpinned by the idea of increasing labour market slack. We do have the upcoming budget that will probably deliver fiscal tightening, probably a little bit of a modest drag on growth. But I guess the question around the magnitude and pace of further BOE easing is still somewhat uncertain as forward-looking pay indicators still suggest wage growth is elevated at around about 3.5%, which should actually be a bit too high in terms of where the Bank of England would expect wage growth to be over the long run to target its 2% inflation target.

So there's a bit of uncertainty. I mean, market pricing is around about 50 basis points of cumulative easing by the middle of next year, just over 60 basis points versus year ends against our forecast of 75 basis points of cumulative easing. So I do think probably the front end of the UK curve does have some scope for yields to trend modestly lower as the Bank of England delivers, as we expect, 75 basis points of easing, a little bit more than priced in by the front end.

And probably that means the very front end of the curve does remain a bit inverted. Flatteners can offer some good carry, but I think our sense here is that outside of a downside BOE easing scenario, then probably how much flattening curves can deliver is somewhat limited over the first half of next year at the very front end. That's great, Francis.

So you brought up the budget, and it seems like during the period in October when the U.S. was in shutdown, obviously we were dealing with the dearth of data, and Aditya's talked about the ECB being in a good place and really range-bound rates at the front end of the curve there. There's been a lot of discussion about the UK budget for the last six weeks or so, and we're anticipating it tomorrow evening. How do you think about term premium in the UK over the coming quarters in the context of the fiscal story you just talked about?

Well, the budget's certainly something markets and people like to focus on. That's always the case in the UK. And I think even when we get through the November budget, I think our sense is looking further ahead, probably we still expect term premium uncertainty to be a pretty substantial driver of UK rates, although in a more episodic manner, and I think certainly against a backdrop of some degree of fiscal uncertainty that can linger over the medium term, probably political uncertainty as we've seen over the past few weeks and also into the local and regional elections in the middle of next year, can keep the curve probably steep and against a backdrop of elevated supply and ongoing, albeit modest, QT from the Bank of England reinforce this idea of a high-term premium environment.

I mean, just focusing for a minute or two on the details, probably the November budget does mean there is a fiscal hole of, let's say, 20 billion that needs to be plugged. Hedren needs to be rebuilt by 5 to 10 billion. I think from a policy standpoint, the exact mix and timing of any sort of taxation measures is unclear at this stage, and what the effect on growth from tax changes is also somewhat unclear.

And I think in this environment, our forecasts do call for some modest steepening of curves over the first half of next year, primarily driven by the Bank of England easing, but this term premium uncertainty around fiscal, and as I mentioned, the political uncertainty and the noise around maybe a Labour leadership contest brewing following local elections in the middle of next year, can just amplify that steepening dynamic. And I think the further out the curve we go, though, probably into the long end and the ultra-long ends, term premium concerns are less relevant, and there it's more about ongoing shifts in supply-demand dynamics, and certainly an environment where probably we do see ongoing reduction in long-end gilt issuance as we go through the next fiscal year that can kind of anchor the very longer end of the curve in the UK. That's great, Francis.

Thanks for that. And maybe to round out the discussion of central banks and rates in the developed market spectrum, Kagendra, turning to you, both the Riksbank and the Nordisk Bank have cut rates this year. Do you think they're done?

And then what do you think, on the back of that, the outlook is for both Swedish and Norwegian yields going into 2026? Yes. So our baseline is that for both these central banks are likely to stay on hold in 2026.

In Sweden, the growth outlook is improving, supported by expansionary fiscal policy and the lagged effects of earlier easing. Inflation is expected to temporarily dip below 1% in 2026, but that's primarily on the effects of the VAT cuts. But the Riksbank seems comfortable with its current stance and is signaling no rush to move rates again.

In fact, we see risks tilted towards further easing, but only if growth or inflation undershoots expectations. So the bar for another cut, in my mind, is quite high. Norway's story is a bit different.

While growth is set to slow modestly, inflation remains stubbornly above target. The Nordisk Bank is maintaining a restrictive quality stance for now and despite market pricing for a cut in the second half of 2026, we think they will be patient. The central bank is signaling that it is done for now and it would take a material negative shock, maybe either from the growth side or a sharp profit in inflation versus expectations to bring forward the next cut.

In terms of our view, for Sweden, we expect yields to remain broadly anchored with two-year and 10-year bond yields forecast at 190 and 255 by mid-26, which are both about 15 basis points below current forwards. The money market curve, in my mind, should stay range-bound with carry trades and curve flatteners, such as the June 6 tech 6 flattener, looking attractive, especially in the first half of the year. In Norway, yields are also expected to drift lower, but only modestly.

We are forecasting two-year and 10-year yields at 375 and 390 by middle of next year, again slightly below current forwards. The front end should remain stable, but we have a bearish bias on the short-dated FRAS and we see flatteners in the curve as a good way to position for the gradual easing that is likely to come further out. So in summary, both central banks are likely done with rate cuts for now and yields in both Sweden and Norway should remain stable to slightly lower next year with tactical opportunities in carry and curve trades as the main things.

I think we're beginning to hear a theme emerge here with careful forms of carry, Kagendra. Thanks for this. So if I just take a look at the spectrum of the DM central banks we've talked about, clearly the pace of easing through most of 2024 and even into 2025 was averaging anywhere between 50 and 75 basis points per quarter.

And as I hear all of you talk, that pace is going to slow discernibly into next year. But the one place that we haven't talked about and probably distinctly different than the rest of the economies we cover is Japan. And that's certainly the outlier to our global view.

And BOJ has been on hold since last hiking in January, but our team in Japan is forecasting a 25 basis point hike next month, as well as one more in mid-2026. So if this comes to fruition, that could leave room for JGB yields to move higher with the curve gently flattening in a bearish format. And our team in Tokyo is targeting 10-year yields at 185 by the middle of the year and 190 by year end.

But there's clearly a big wild card here as the dynamics between the BOJ and the Takaichi government. And there is a certain risk that the back end of the curve is asymmetrically skewed towards sustained steepness, considering that the ongoing fiscal debate and structural supply demand imbalances point towards higher long-end yields there and super long-end yields. So I think that's one thing where it's completely different than the rest of the world.

But now if we kind of flip the conversation to the front end, we've had a long discussion here about duration and curve globally. Teresa, I'd like to bring you into the conversation and talk about what's happening at the very front end. And that's a good segue into the derivatives market as well.

That this year has been marked by notable tightening in secured funding conditions. And TGCR has averaged about five basis points over the interest on reserve balances for the past month, which is the highest we've been since late 2019, which everyone may remember was just in the aftermath of the apocalypse. So this plus the rise in the federal funds effective rate within the administered rate range suggests to us that reserves are closer to ample.

And we know that the Fed will end QT next week on the 1st of December. So with that as the backdrop, what's your outlook for funding markets next year? And then even more importantly, the tools that the Fed has put in place, and mainly the SRF, how important will that be in stabilizing funding markets?

And is there anything else that can be done to increase its efficacy? Sure. So as you said, we're now navigating an ample reserves regime, which is not something that I would say we have a lot of experience with.

We haven't operated in an ample state for a prolonged period amount of time. So this is somewhat unfamiliar territory. And so with it, it will bring about, you know, a less forgiving liquidity environment where funding markets are likely going to be more volatile, more sensitive to structural pressures, whether it's coming from the Fed's balance sheet policy, fiscal policy, or bank intermediation capacity.

In other words, repo rates are going to stay elevated. And just how elevated I think remains to be seen. And in that sense, you know, the standing repo facility, the SRF, is going to be critical in stabilizing funding markets.

We've already seen usage at this facility, not just on month ends and quarter ends, but on a more consistent basis throughout the month, which is, you know, I think a really good sign. But arguably, it hasn't been as effective in capping repo rates on the upside, as we have still seen SOFR and TGCR trade above the SRF rate during certain days of the month. So you know, with that, more needs to be done to improve its efficacy.

And what can be done? You know, we think there are a few options. One, they could offer SRF on a continuous basis instead of just via two auctions throughout the day, such that banks and dealers can basically have reserves, have access to reserves on demand.

I think this helps with the distribution and plumbing issue in the repo markets because, you know, repo markets is mostly an early morning market, which gives a very narrow window I think to redistribute liquidity around the system. The second thing that they can do is lower the SRF rate, which I think has the benefit of divorcing the SRF facility from the discount window as a backstop facility, but we're looking at the SRF facility as a facility to help transmit monetary policy efficiently. And the third option they can do is just to make the SRF operation centrally cleared.

I think these are all potential options, and in the absence of that, if they don't do anything to the SRF, they can also engage in TOMOs, lower the IORB rate, or just add reserves back into the system, which we do think they will do. We think they will engage in reserve management purchases in January 2026. So there's a variety of tools that the Fed can engage in to, I think, control money market rates in 2026.

We'll just have to find out kind of where the Fed lands on that. No, that's great, Teresa. Thanks.

And I think that's an important sort of distinguishment for everyone who's listening that we do not expect the funding markets to really become dislocated like they did in the late summer, early fall of 2019, and you've really set the backdrop well for EPEC. And we're going to bring you in now to talk about swap spreads in the U.S. So it's been a pretty incredible move here over the last five or six months, and swap spreads at the long end of the curve, which were on a sustained tightening trend for most of the last couple of years, have actually widened back 10 to 15 basis points since the early part of the summer.

So in your outlook for next year, is this widening justified, and how does it influence your thought process on spreads into 2026? Thanks, Jay. And yeah, it's been quite a few months for swap spreads, and actually, I should say like it's been actually quite a bit of a year as they've traded in very wide ranges.

And to your point, long end spreads are now 10 basis points wider than where they started. And in the past few months, the widening in swap spreads was due to a few tailwinds, which may continue into the next year. So one, definitely, the deregulatory optimism.

So that started us off in the year, and then it continued all throughout. And actually, it appears that SLR reform may be close to its end stages, which showcases how important regulatory reform is for this administration, and how fast things are progressing. And we actually now look for SLR reform to be effective in the first quarter next year, which means Basel III endgame and GISA reform are likely next in line.

So while we don't think any of these reforms could result in significant increased demand for treasuries, and thus impact swap spreads, it could on the margin support better liquidity and funding conditions, which I guess, like, will support swap spreads. And there was also, you know, in terms of other tailwinds, there was also anticipation that Treasury Debt Management Strategy and the Treasury would take a more activist approach and reduce coupon auction sizes, which is something you've actually been pushing back against, and which did not materialize in the November funding. And finally, there was the Fed balance sheet policy and anticipation that the Fed would end QT earlier, which indeed, in the last meeting, they noted that QT would end next week.

And we now expect reserve management purchases to start in January next year. So putting it all together, these factors all supported spreads in the past few months, and they could continue to provide a floor for spreads into the next year. But if we look at the fundamentals, one of the big drivers that will likely push spreads narrower is the cost of leverage, which we define as the total outstanding debt that needs to be absorbed by liquidity in the system, which is likely to increase in the next year.

So the evolution of this factor is likely biasing spreads narrower and spreads go flatter. But there are some offsetting risks and the tailwinds that we just talked about. That's perfect, Ipek.

Appreciate that. So let's actually move to the euro part of the swap spread curve here. And, Kagendra, there's been a lot of focus and volatility in German swap spreads as well this year.

And this volatility has probably been more technically driven. Issuance, clearly a piece of the puzzle there. And then this long-anticipated Dutch pension fund flow-related move as well.

So how relevant will both of these factors be next year, particularly because we heard Aditya say earlier that he thought that this increase in German issuance should be pretty well absorbed by the foreign community. And then how does that parlay into the expectation on German swap spreads into next year? Yeah, so, you know, German swap spreads have really been in the spotlight this year, and it has been, in my mind, less about macro fundamentals and much more about technical drivers.

So like you mentioned, two factors stand out. This is the German bond issuance and second, the ongoing Dutch pension fund transitions. And looking into 2026, I think these technical themes will remain front and centre.

On the issuance side, like Aditya mentioned, we expect the German bond issuance to stay high, but it's also largely anticipated by the market. So I don't see this issuance to be the source of fresh volatility for spreads. The Dutch pension transition is a bigger wildcard.

It flows around anticipated unwinding of long-end interest rate hedges from these funds. It has been a major driver of the 1030s swap curve, which has moved significantly steeper this year. It has also pushed long-end spreads wider and a steeper bull box of spread curve as well.

So we expect this to continue into next year, especially as more funds prepare for transition in 2027 as well. The timing and magnitude of these are very hard to predict, but the market is already positioning for further steepening. Now, I need to remind you that or highlight that other technicals are also in play this year.

There is the issue about mortgage-related paying flows. Then the net interest in companies hedging by banks will also keep intermediate spread volatile. Then there is the upcoming Solvency II regulatory changes, which could push long-end spreads wider, especially in the second half of the year.

So where do I – how do I combine all of this into my view? I think front-end spreads like sharps and bauble will stay in a tight range with a slight widening bias as funding rates remain largely stable given our ECB view. Good spreads should see some further widening, mainly driven by these touch flows and regulatory changes, but the scope for big moves is limited in my mind given current very rich valuations.

The bull box spread curve steepening is a high conviction thing for us, which reflects ongoing supply and demand dynamics at the long end. So this is also, as I highlighted earlier, reflected in our 1030s SOP curve steepening view. Thanks, Kagendra.

So kind of touring through the spread universe and through rates and curve, we've heard a lot of theme here in the podcast so far about carry, which leads us to the final topic in vol. So Ipek, if I can just pivot it back to you, and really for Kagendra as well, vol in both the U.S. and the euro area has come down pretty hard, and in the U.S. the peak was the Liberation Day announcement. What do you think, Ipek, that a shallow Fed easing cycle before going on hold next year should mean for implieds in the U.S.?

And is there a differentiation along the surface about what it means for implieds on various parts of the surface as well? Sure. So implieds have been declining since reaching their highs in April, and some of this decline was driven by technical, so by carry-seeking, systematic gamma selling strategies.

And some of this decline, we believe, was driven by risk premium not being fully priced into the markets. So looking ahead, you're spot on. We do expect to see some divergence between the upper left and the deep vega sides of the surface.

So we expect the upper left to continue to decline as the Fed delivers just two cuts next year and then is on hold. So that means delivered vol is likely to be low, which will support market liquidity, and implieds can continue to decline further, and it's also an attractive carry-seeking strategy. In the longer expiries, and especially in the deep vega side of the surface, vol-rate relationship is one of the most important drivers of the implieds.

And since we expect slightly higher yields into the first half of next year, we also expect slightly higher vols. And also, especially in that part of the surface, valuations help as well, since implieds look relatively cheap. Thanks, Ipek.

And now, Kagendra, if we can just pivot it back to you. So central bank on hold, we've talked about having a slight bullish bias in duration. We've heard about Aditya kind of talk about further carry-seeking opportunities in interim use spread.

Is there carry in European vol as well? And as a vol investor, what are the attractive opportunities right now? Yeah, just to add on to what Ipek was saying, euro vols have also dropped sharply this year, and it's a story that closely mirrors the US.

The ECB has made it clear that it is comfortable staying on hold around the 2% rate, and that's anchored the market's expectations and suppressed volatility. With this low volatility regime, I think it will continue to persist in 2026 as well, at least in my baseline scenario. We are forecasting front-end implies like, let's say, three months to a year to be broadly unchanged in the first half of 2026, with only a very modest uptick later in the next year.

Of course, there are risks like aggressive ECB easing or unexpected macro shocks, which could cause temporary spikes in volatility. But I would think that these spikes would be short-lived rather than sustained shift and, in my mind, opportunities to fade. So what does this mean for vol investors?

I think the best opportunities are in selling gamma in Europe, especially at the front end. Especially if we superimpose our view of a mean-reverting environment, then short gamma with infrequent delta hedging emerges as a strong trading theme in the first half of next year. I think selling unhedged straddles on front-end arrival contracts like June 26 or Sep 26, they offer very wide breakeven ranges and attractive carry with a very low probability, in my mind, of yield breaching those levels as the ECB stays on hold.

Now, I also highlight that on the vol theme, conditional curve trades are also attractive. So bear steepness and bull flatness remain compelling on the two-stems curve in Europe, for example, and because options markets aren't fully pricing the delivered directionality we have seen recently. So to sum up, the low-vol dynamic is likely to persist as long as the ECB remains on hold.

And as I mentioned, the best opportunities are in selling gamma, trading the mean-reversion, and expressing curve views through options. Thanks, Higendra. And thanks to all of my colleagues for taking the time to talk about the outlook across developed market rates next year.

I would encourage our investors to take a look at both our U.S. fixed-income markets and our global fixed-income markets 2026 outlooks, which are both available on J.P. Morgan Markets. And I think this is a good place to leave it here.

So thanks for listening today, and stay tuned for more episodes of At Any Rate, J.P. Morgan's global research podcast series. This communication is provided for information purposes only.

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