Global Rates: ECB and BoE meetings, French spreads and Dutch indexation
In the wake of the recent ECB meeting, the desk interprets current Euro market dynamics as supportive of a bullish stance, particularly following significant developments such as the appointment of a new Prime Minister in France and the forthcoming Bank of England meeting. Per the full note from J.P. Morgan, the experts stress a focus on French spreads and their implications for market positioning, hinting at a likely tightening in spreads as the new PM’s policies unfold. Thus, traders are advised to align with this narrative, particularly as it reflects broader market perceptions regarding rate trajectories in the Eurozone and the UK. Overall, the focus on rate differentials remains paramount, especially as positioning adjusts heading into the BoE conversation.
What the desk is arguing
The desk posits that the Euro market is set for a positive shift, primarily driven by the ECB's recent policy stance and the political climate in France. Per the full note from J.P. Morgan, there's an anticipation of changing spreads as new fiscal policies emerge under France’s new leadership.
Supporting this view, the commentary suggests that the ECB meeting has solidified expectations surrounding rate adjustments and their impact on the Euro’s valuation, potentially leading to tighter spreads across French bonds. This anticipation is heightened ahead of the Bank of England's policy meeting, which could further influence EUR/GBP dynamics, with current Eurozone inflation data also playing a significant role in shaping market sentiment.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Notable firms include: - jpmorgan - 1.10 (Mar26) - bofa - 1.04 (Mar26)
The desk's upbeat outlook aligns with jpmorgan, indicating a bullish angle well-supported by recent ECB narratives, while diverging from bofa's more cautious prediction at the bottom of the range.
How other firms see it
Firms like jpmorgan and several others remain optimistic about the Euro's strength, aligning their forecasts with the desk's bullish perspective. On the contrary, bofa reflects a more bearish view, predicting a return to lower levels for the Euro against the Dollar.
Upcoming developments, such as the Bank of England’s monetary policy decisions, could create volatility in related currency pairs like EUR/GBP and provide critical insights into the shifting rate dynamics influenced by the ECB's decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The ECB's recent stance is bullish for the Euro market.
- 02Expect tighter spreads in French bonds following the new PM's policies.
- 03The BoE meeting will further influence currency dynamics.
- 04Current consensus indicates a Euro target of 1.075.
Market implications
Traders should monitor the EUR/USD level closely, particularly around the consensus target of 1.075, as developments from the BoE meeting on policy adjustments could create volatility and opportunities for positioning adjustments.
Risks to this view
A shift in market sentiment could occur if the BoE surprises with a more hawkish or dovish stance than currently anticipated, potentially reversing current spread tightening and altering Euro valuations significantly.
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 Dymond from European rates strategy at J.P.
Morgan. Today, I'm joined by my colleagues Aditya Chaudhry and King Andrew Gupta to discuss thoughts on Euro area rates after the September ECB meeting, front spreads following the appointment of a new prime minister this week and the upcoming Bank of England meeting. We're recording this podcast on 12th September 2025.
Our comments today are based on a published research available on J.P. Morgan markets. So earlier this week, the ECB kept rates on hold at 2% as widely expected with staff projections that do show a larger inflation undershoot.
Although President Agard downplayed this in the press conference and ECB continues to stress it's in a good place. So if you look at front end yields, they're higher on the week. So King Andrew, when you look at the pricing at the very front end of the curve, there's about 10 basis points or so now of cumulative easing price by the middle of next year.
Do you agree with market expectations now for the ECB policy rate? And how do you see front end yields evolving from here? Hi, Francis.
As I see the, you know, the ECB seems to be content with their progress on inflation and does not seem to be too worried about the small deviation in their forecast from the target, especially with respect to core inflation versus the 2027, which actually widened this yesterday in September relative to the June forecast. President Agard did mention that the ECB will look through small deviations from the target unless there is sufficiently large shock or there is a persistent deviation, which in this case means undershooting of inflation versus target. Now, of course, what counts as a sufficiently large deviation shock doesn't really, was not very clear.
So as far as the forecast goes, there is an easing bias, given that there is an undershoot and the staff assumptions already include some easing in policy rates based on, which is based on market levels. The S2 curve, as you mentioned, is now pricing only about three basis points off-cut by the December meeting and a cumulative 10 basis point off-cut by June 26. And that also happens to be the trough of the S2 curve.
I believe that the bar for any further rate cut is high and it will require proof of data, which could be either weaker growth and or persistent inflation undershoot for the ECB to deliver another cut or one or two cuts. I mean, in any case, market pricing of another around 10 basis of cumulative cut by mid-2026 is fair in my view, as current ECB forecast warrants an easing bias. Our economists expect one more cut from the ECB now to be delivered in December versus October previously.
And if I look at other front-end yields a little further out than overnight rates, we think they will move in a tight range. A trough of around 10 basis point is probably close to the ceiling. A trough of around 10 basis point off-cut is what I mean, is probably close to the ceiling of how high this can potentially go.
And this translates to further money market sectors as well, not just for the trough of the curve. For example, you know, one-year, one-year ester at around 190 in my mind is broadly fair, but risk reward over the medium term would support long-duration positions given the risk bias. We also think that the front-end of the Euribor curve is biased steeper, especially if yields rally, which basically means that market pricing of any additional rate cut is going to be front-loaded.
So, for example, you know, March 26, March 27 conditional bull steepener implemented via March 26 calls is an attractive way to position for a steeper money market curve. Okay, thanks. So, I guess the method there is probably it's range trading at the front-end, but maybe with a little bit of a bias.
So, 10-year yields have been trading in a 15 basis point range over the past few weeks. So, Aditya, do you think this can continue going forward? And what about the shape of the German curve itself?
Is it too early to start to think about the impact of 2026 German issuance on the curve? Thanks, Francis. So, yeah, indeed, the German yields have been range-bound, like the 15 basis point range you mentioned in the 10-year sector.
It remains like what we've been saying is like we have this modest medium term bullish bias on duration and we remain comfortable with that, like we like the 10-year sector. And that bullish bias is on the expectation of limited term premium in the German curve, which as of now, given the recent flattening of the curve, I think has now quite limited in current pricing, but also the positive carry, given that the 5-10-year pattern already yields you positive carry on the German yield curve. And more importantly, our view that there will be improving long-term duration demand for ECBs, specifically for high-rated issuers like Germany over the medium term.
And this is sort of underpinning our medium term bullish duration bias that we are talking about 10-year Germany is going closer to 250, so not a significant rally, but still a decent amount of upside from here if you are long duration along with the positive carry you are on it. The ECB delivery this week does little to change this stance as the market is already pricing the ECB effectively on hold, as I mentioned, and in our view, the forwards in 1-year, 1-year and 2-year, 1-year have quite limited room to sell up further. So, we don't see much risk coming to, let's say, the duration on the intermediate sector from the front by lack of immediate euro rate specific drivers.
And we expect that German rates will continue to decouple from US or UK rates if this type of, let's say, the fiscal bullish term premium uncertainty, because we believe these factors are not that of a concern for the German or euro rate markets. And on the margin, we believe that heightened fiscal and institutional uncertainty in other markets should benefit euro, specifically Germany, based on what we are saying, like the increasing medium-term demand of German paper we expect over the medium term. So, net-net, I think we remain comfortable despite the ECB delivery this week.
And the point you mentioned, like on the 2026 issuance, indeed, German issuance will pick up as the investment and defense spending plans fully kick in from 2026. And we expect the net issuance for German in Germany, net bond issuance, to be around 115 to 135 billion versus what we saw as roughly around 85 billion this year. So, a 30 to 50 billion increase.
So, a decent increase up after already a 30-odd billion increase this year. So, clearly, there will be more supply to be digested in Germany. However, as I mentioned before, we do not believe that the fiscal term premium as a German story over the medium term.
Despite this fiscal increase, we believe the peak in German debt to GDP will still remain just below 70% over the medium term, which is still materially below the larger DMP. So, net-net, I think we don't believe this higher supply, the digestion of that will be an issue and should lead to any significant repressive term premium or drive the curve steeper. If it does, drive it, we will be feeding it.
Okay. So, that's pretty clear in terms of German views. So, let's shift to talk a bit about politics and the political situation in France with Macron's appointment of Le Corneau as a new prime minister this week.
So, Didier, do you still think French-Germany ten-year spreads are going to trade in the range? And what political outcomes can have a material impact on French spreads from here? Definitely.
They're having a few political developments this week and the French spreads have tightened sharply over the week as the outgoing prime minister, Bayrou, he resigned after he lost a confidence vote, which was widely expected. And then Macron named Le Corneau as the new prime minister and that will be within hours of Bayrou's resignation. Just to give you some context of the market, the ten-year French-German spread has tightened back to, let's say, roughly around 72 basis points on the old benchmarks we look at after widening to almost around 80 basis point in early September from the lows of roughly around 70 basis points.
So, we did almost have done a full round trip from 70 to 80 and back to 72. So, looking at these, based on our fair value models, the market has pretty much priced out all the political uncertainty risk premium, which was priced after a surprise call of confidence vote. So, market has taken the recent developments quite positively.
We had expected Bayrou to lose a confidence vote and also expected Macron to be like he would like to avoid the early election and then he will go down the route of choosing a new prime minister. So, and that's what he did. The surprise to us was that Macron named the prime minister right away, as we had expected that it could take some time, as he might have to consult with other parliamentary parties before making an appointment.
And instead, what he did was he nominated the prime minister from his centrist camp and he tasked him to run the consultation with the lower house parties regarding the budget before nominating government members. So, he sort of flipped the process and that's what I think was a bit of surprise to us. And now, the prime minister has to start discussions with the opposition parties and that would be the key for the budget.
It is still too early to make a judgment on like will he be able to deliver a budget, which camp, because he will have to find compromises with either the right, the RN or the left, let's say the socialist, in order to, let's say, approve a budget in this current lower house. And it's still unclear how this process will go ahead. But as things stand, our judgment is that it's still more possible, let's say just above 50 percent, that the PM is eventually able to get the 2026 budget through the parliament.
However, the visibility is still low as we wait for his next steps. Looking at the market, as I said, the market is almost a full round trip, as if the continence vote was not even called. I think the market is now pricing a very high likelihood of the prime minister surviving and successfully delivering a 2026 budget, as I mentioned above.
Yeah, this seems plausible. But in our view, the market is still under appreciating the challenges the Lakhanu faces in finding a compromise on budget in current lower house. And we believe that the risk of a new lower house elections are still quite high.
And if it plays out that way, like if he is unsuccessful in finding a compromise, and we go towards the early election, I think the 10-year finance minister can easily go back to 80 basis point or higher levels on that surprise election announcement, because that again puts the uncertainty back in the market, even though in extreme scenarios, also, we don't expect, in major scenarios, we expect fiscal tightening, but still the uncertainty can increase again. And the market is not pricing that. So at these levels, after the recent tightening, I think we are getting, again, a bit more cautious on the French spreads versus where they were last week, which was close to fair in our view.
So Francis, can we now move to UK, we have BOE next week, and the market expected bank rate to firmly stay on hold at 4%. Do you think the BOE can cut rates this year? And what message do you expect from them next week?
Yes, you're right. BOE is widely expected to keep rates on hold at 4% next week at the September meeting. And when you look at what's priced, I mean, there's very limited chance of BOE being actually priced in the coming months with the front end of the curve pricing less than five basis points of cumulative easing by November.
So I think for next week, I think the messaging will be very much one of not huge changes in terms of the language, particularly the forward guidance language. And I think that reflects the fact the labour market is still easing. And probably the Bank of England still want to keep an easing bias through its language, which has stated this gradual and careful approach to further withdrawal of monetary policy.
But I think it's probably a bit too easy for the Bank of England to try to tweak that or change this gradual language. And I think that probably would be perceived by the markets as the Bank of England shifting to a much more permanent on hold position when we still have just over sort of 35 basis points of cuts priced by middle of next year. So I think we do have a sense that in the short term, the data on the output side with robust output data, the upcoming bump in headline CPI will just keep a degree of uncertainty among the MPC over the timing of any further moves.
So whether or not they cut this year, I still think is not particularly obvious. I think when we look at next week's meeting, maybe the only area where we might get a bit of a guide in terms of how they're thinking about the path of easing over the coming months could be the vote split. We expect two dissents for a 25 basis point cut, probably Taylor and Dinger as MPC members.
But I think in order to kind of keep alive the prospect of 25 basis point ease for November, you probably need to see another member dissenting for an ease, most likely Ramston to kind of keep that prospect alive. And the QT announcement, Francis, that is also in the focus from the VOE, with most people expecting a reduction in the QT envelope. What are your thoughts on that?
Yeah, I think reduction is pretty clear. I think that's what most people expect. So if you look at the QT envelope for the current period, it was 100 billion.
The bulk of that was made up of the APF guilt redemptions of close to 90. So I think it's pretty clear we will get a reduction in the overall size of the QT envelope for the upcoming 12-month period. And don't forget, that period runs from October to September.
So they announce at the meeting next week, the actual QT period is effective from October onwards. We think that size will reduce around about 70 to 75 billion for this next period. So I actually do see an increase in what Redeem, the bond rolling off from the Bank of England's APF portfolio, so redemptions for the next 12-month period are closer to 50 billion.
So it does actually imply the active QT sales will be going up even though the overall envelope is coming down. So probably active QT sales somewhere in the region of 20 to 25 billion is what we think. And I think that's probably relatively market consensus, although maybe there's a bit of debate around what the size of that active sales portion of QT could look like.
I do think there will be some shifts though in the way in which the Bank of England conducts the QT sales across the curve. I think probably sales will only be conducted in the short to medium QT buckets with no long-end QT sales. I think there's probably a reasonable market expectation as well for that happening.
And I think the DMO reducing long-end issuance will enable the bank willing to reflect that as well in its QT program. And we have the shifting supply-demand dynamics at the long end of the curve as well, probably give it a good opportunity and a good reason not to conduct any QT sales in the long-end part of the curve in my view. So finally, let's wrap up the discussion with a favourite topic in that of Dutch pension funds, obviously transition and the impact of transition flows has been a theme for most of this year.
But actually September sees a technical sort of adjustment when funds announce indexation. So Kigendra, is this something we should think about as an important driver for European rates, markets and curve over the next month or so in your view? Yes, Francis.
To be fully correct, the indexation for the next year is generally based off the September inflation print and funds announced this indexation over the subsequent weeks after the inflation number comes out. Now, in theory, a large indexation would imply increased liability for these funds and thus they receive at the long end to hedge this. Now, of course, the level of hedging will depend on the level of indexation and the funding ratios for the funds.
And also, it depends on their current hedge ratios as well. The other thing to note is that the funds, although they announce indexation levels sometimes towards the end of October, early November, but they don't really wait for the hedges to set the hedges by that time. So therefore, we have the chatter about reaction of 1030s in September, October, because this is when potentially the funds are setting up the hedges.
Now, in any case, estimating the magnitude of flows that would materialize, even if we make assumptions on indexation, is difficult as historical numerical data on how much TVO1 receiving has gone by based on indexation is very hard to get by. Now, if I just look at the seasonality of the 1030 swap curve around these indexation flows, I find the evidence to be mixed. For instance, we saw a large flattening in autumn of 2022, when it was the first time after a very long time that inflation had jumped and consequently indexation was high, leading to a sharp flattening of the curve.
Now, you can also argue that some of this flattening was driven by the ECB hiking cycle that it was going through. Now, if I jump to 2023, even though the indexation was relatively high, we didn't see any material flattening of the 1030s curve in the September, October period, even though ECB was kind of almost at the end of its hiking cycle and market was still pricing some more hiking, we should support some flattening. In 2024, we did see some flattening, even though in contrast, the indexation was really low compared to 2023 and 2024.
So, the evidence in my mind is really mixed. This time around, the upcoming transition also may limit the desire of these funds to set additional hedges, given that funding ratios are elevated and hedge ratios are also relatively high. Now, having said all these, I'm still not chasing steepness now, despite the sharp flattening that we've seen this week, because steepness remain a crowded trade and risk of further flattening remains non-trivial.
So, I'm being watchful in 1030s and keep a structural steepening bias on the curve for now. Okay, thanks Kigendre and Aditya. 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, JF Morgan's global research podcast series. This communication is provided for information purposes only. Please read the JF Morgan research reports related to its content for more information, including important disclosures.
Copyright 2025, JF Morgan Chase and Co, all rights preserved. This episode was recorded on 12th September 2025.
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