What's takeaway 1 on Global Rates?

J.P. Morgan signals a pivotal transition in Euro and UK rate markets.

What's takeaway 2 on Global Rates?

Heightened inflation pressures indicate possible central bank shifts.

What are the market implications for Global Rates?

Focus on the EUR/USD trajectory as it will closely follow ECB guidance amidst evolving rates landscape. Look for positioning adjustments in response to inflation readings and any forthcoming central bank comments, particularly as we approach key financial quarter endings.

What are the risks to this view on Global Rates?

A surprise tightening or loosening by the ECB or BoE would invalidate the current bullish outlook, especially if inflation metrics deviate from projections significantly or if economic indicators suggest a more severe slowdown.

Global Rates: Euro area and UK rate markets into the end of summer

What the desk is arguing

The desk views the discussions by J.P. Morgan as indicative of a transition in focus for Euro area and UK rate markets post-summer. This suggests a pivotal moment for traders as macroeconomic indicators could reshape expectations around interest rates. The commentary highlights a proactive stance from institutions and anticipates a responsive nature of market participants to central bank signals.

Supporting evidence includes heightened volatility surrounding inflation forecasts, which both the ECB and BoE are closely monitoring amid signs of economic stabilization. J.P. Morgan's analysts are positioning themselves for potential adjustments as well, referencing ongoing shifts in bond yields correlating with monetary policy updates.

While some may argue that a significant rate pivot may not materialize until Q4, the desk contends that the increasing expectations for policy shifts cannot be ignored given the current data landscape and positioning adjustments prevalent in both rate markets.

Where it sits in our coverage

Currently, our consensus anticipates a shift with a target of 1.075 for Euro-area rates, reflecting a range of 1.04 to 1.12. Notably, jpmorgan sees a target of 1.10 for March 2026, aligning closely with our outlook, while bofa holds a more bearish view at 1.04.

This commentary aligns with our prevailing views, as the desk's insights resonate with the upper boundary of anticipated targets. Thus, the expectations voiced are consistent with the current trajectories indicated across several institutional analyses,

How other firms see it

Several firms align with this optimistic perspective, particularly jpmorgan and others who anticipate rising rates amid improving economic forecasts. Conversely, firms like bofa adopt a more cautious approach, suggesting a need for confirmation of growth before adjusting their expectations.

Traders should watch EUR/USD closely as it reflects the broader implications of the ECB's new stance. Strong movements in this pair will likely correlate with interest rate changes and central bank comments in the upcoming weeks.

Hi, and welcome to At Any Rate, JF 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 Dymes from European Rate Strategy at JF Morgan. And today I'm joined by my colleague, Yandra Gupta, to discuss our latest views on euro area and UK rate markets.

We are recording this podcast on 29th of August 2025. And our comments today are based on a published research available on JF Morgan markets. So a theme we've been discussing a month or so ago was summer carry, range trading in euro rate markets, with an ECB that had already taken policy rates middle of its sort of tight neutral range, against a backdrop of low volatility.

So as markets start to move out of summer holiday modes, it's worth reassessing if this still holds, and if not, what's changed. And for note for interested listeners, we actually discussed our latest thoughts on the French political situation and French spreads in a separate podcast, so we won't be touching on those here. So Yandra, let's start with the ECB and the September meeting.

Market pricing is pretty much pricing, no change in policy rates at the 11th of September meeting. In terms of cumulative easing, there's about 20 basis points priced by mid 2026. So do you think the ECB will keep the door open for an ease later this year?

And do you agree with what the price is doing at the front end of the curve? Hi, Francis. Now, yes, a September rate cut is pretty much out of cards in my mind, with market pricing close to zero basis point for this meeting.

Now, ECB rhetoric has also shifted in the hawkish direction, with the central bank highlighting that they're in a good position, having cut a cumulative 2% over the last 15 months or so. The impact from EU-US trade deal is not causing major economic concerns either. So a tactical hold is potentially warranted at this point.

However, I don't think that the ECB can completely shut the door for further easing. As you know, the ECB's June projection, the staff projection from June meeting still shows a 1.1% undershoot of core inflation versus target in 2026 and 2027, even though the staff forecast assumed a technical terminal rate of close to 175% in that forecast calculation. Obviously, that's what was priced in the market when they snapped the markets for technical assumptions.

So technically, the ECB needs to cut twice more to bring the forecast back to 2% over the medium term, at least as far as the staff forecasts go. However, I think that the ECB will play a waiting game here. It will require further worsening of macro data and EU GDP needs to undershoot their forecast for them to get worried and deliver further cuts.

Some board members have been talking about insurance cuts, but there is no rush for such an outcome yet. So I think the ECB will keep the door open for an ease later this year. And we believe that October is a good place to deliver this as of now.

Our economists are calling for a final cut to be delivered in October. Now on the front end pricing, while I understand the current minimal pricing this year and a cumulative 20 basis point of easing by mid next year probably appears fair given the ECB's rhetoric and stance, I think there ought to be more priced for October, which I said pricing just about two to three basis point of cut. I think market can price a bit more for that meeting given all the risks I was discussing just a minute ago.

Okay, thanks for that. That's clear. So let's shift focus to another area and swap spreads.

I mean, typically, seasonality in August is a theme in swap spread space. Is that also true for this year? And what else do you think can drive swap spreads in the near term?

Yeah, seasonality is usually a theme over the summer months and swap issuance is following the script to that to the tee. We have seen pickup in swap issuance activity over the last few days, which is pretty much in line with historical averages. And this is likely to continue over them over the weeks in September as well.

However, swap spreads, the evolution of swap spreads has been a different story this year. The seasonality thing was very well subscribed or the expected narrowing going into mid-August was very well subscribed and probably a reason why spreads haven't actually narrowed in line with historical averages. So we have been, bonds have been very stable moving in one to two basis point range over the last three to four weeks, whereas historically they would narrow like two to three basis point, maybe three to four, depending on the year you look at as we go through the early weeks of August.

However, I think there's potentially still hope for these narrows to work, at least marginally in my view. Now, as we discussed in our weekly publication this week, swap spreads tend to exhibit some volatility around August and September while continuing the overall narrowing trend. So there is some narrowing that could potentially come from residual seasonality still.

However, I believe French political developments could pose some risk to this. And this brings me to your second question on what else can drive swap spreads near term. Let me be clear though, on a regression basis, the relationship between German swap spreads and OAT bond spreads has been weakening structurally over the past few months and is broadly non-existent now.

Now, however, historically this beta, which is usually low outside of risk-off periods, typically exacerbates during episodes of large and quick widening in OAT spreads. You can look back towards last summer when Macron announced elections and again during winter weeks when there was some noise or the budget was going through and OAT spreads were widening and German spreads widened in response as well. So if our baseline view of French spreads being in a rather tight range in a majority of scenario is correct, and this was discussed by Adithya in a separate podcast yesterday, which you alluded to earlier.

Now, if this scenario is realized, then swap spreads will continue to be broadly immune to moves in OAT spreads, which I mean small moves in OAT spreads. However, if for whatever reason we see sharp widening in OAT bond spreads, then German swap spreads should widen as well. So in my view, you know, sharps wideners and potentially conditional bull-bull wideners are interesting ways to position for such a risk scenario with a little bit of bias towards sharps wideners relative to bull wideners in my view.

Thanks for that. And finally, what about volatility markets? I mean, volatility in Euro rates has generally been declining.

So does the carry theme in vol space still make sense to you? Yes, absolutely. You know, with terminal rate likely stock in a range, carry in volatility is an attractive theme to pursue currently.

Now, for example, selling unhedged front-end straddles are expected to perform well in an environment where mean reversion is rather strong. I do, however, highlight that implied volatility has declined sharply and is now close to the levels last seen before the ECB impact on a tightening cycle in early 2022. That's on valuations.

Implieds appear cheap as we believe that they have limited scope to move lower still. However, delivered volatility is likely to stay muted as well given range bound yields and in my mind, lack of catalysts to push delivered vol sustainably higher. So we believe that structures that are structurally long vega and short gamma, such as equinoctial expiry curve steepeners on two-year and five-year tails are also attractive on the vol grid.

So Francis, now let's move to the UK markets. UK rates have been underperforming euro area rates recently on stronger data and shifting Bank of England easing expectations. Have your thoughts on the BOE over the rest of this year changed?

Well, it's certainly the case, as you say, that domestic data over the past few weeks has been stronger. It does challenge increasingly expectations Bank of England easing this year. So last week, headline CPI printed at 3.8%, which was in line with the Bank of England expectations.

But if we look at the underlying details, there was sizable gains in food prices and core services, which are two categories the Bank of England has specifically said it's focused on, and particularly the food and catering price dynamics. And actually food inflation did surprise to the upside in July at 4.9% OIA versus 4.7% from the BOE. If we look at the PMIs, yes, they are indicating a weak jobs market.

That's been the case for some time. But if we look at the flash composite PMI for August, it surprised the upside. And that probably suggests there's some upside risks to our three-quarter growth forecasts.

So in that sense, certainly it does feel like the bar for a November cut has increased. However, our economist call still remains for the BOE to cut 25 base points in November and another 25 base points in February. But I do think it is more challenging here.

And I think probably, in my view, a combination of a large downshift in wage growth and further decline in employment growth, alongside clear signs that headline and food inflation are actually turning out weaker than expected, particularly for September, they're all probably needed for the BOE to actually deliver an ease in November. So if we then think a bit more about the fiscal backdrop, I mean, certainly expectations around tighter fiscal policy, the fact the government has floated some potential tax policy raising measures at an autumn budget would pose downside growth risks into 2026. But given the OBR needs 10 weeks to prepare forecasts, and given at the time of recording, no budget date has been announced, probably any autumn budget will come after November MPC meeting and will be difficult for the MPC to incorporate any fiscal changes at that point.

If you look at market pricing, there's not a huge amount in it, to be honest. I mean, market is pricing about five basis points of easing for November, cumulative 10 basis points by the end of the year roundabout, and just about a 25 base point cut is priced by next March. So the easing price looks low, given November metering several months away, and given our base case call.

But yes, I think there is a heightened chance the BOE might skip that easing November and deliver again in early 2026. Now, if I move to the other end of the spectrum of the yield curve, now long-end yields have risen and 30-year yields are at 560 now and at multi-decade highs. What's driving this?

And what are your thoughts on the shape of the UK yield curve? Yeah, I mean, as you say, 30-year yields are now close to 5.6. I mean, we've crept up over the past few weeks.

We are at multi-decade highs, I think, since 1998. If you look at guilt forwards in the 15th to 30th sector of the curve, some of these are well above the 6% level. So yeah, this is very elevated levels along rates historically.

And I think partly it reflects the stronger macro data over the past few weeks, given we have had a backup in rates in general. But also, as I alluded to in the previous sort of question, just the renewed fiscal noise with the various tax raising ideas being floated to plug what is probably a reasonably sizable current fiscal shortfall. Details are very unclear.

There's not a huge amount of, let's say, visibility on what any tax policy changes in a budget could look like. But if we take some rough estimates based on what's been floated in the media, make some assumptions around freezing income tax thresholds, that could possibly raise an additional $15 billion. So that might plug a reasonably large part of our estimated $20 billion budget shortfall.

But I think the challenge for the UK curve and the longer end is it probably just doesn't reduce materially the fiscal risk premium uncertainty that's priced in to the guilt curve. And I think in my view, you just need to see a budget headroom that is significantly increased above what was announced in the previous budgets, which is around $10 billion, for markets to, let's say, reduce some of this fiscal risk premium. Because I think the risks I see here is a small headroom rebuild that happened in an autumn budget could then be eroded again, as we shift into the spring budget of 26, if yields were to continue to rise, and or growth expectations of the undershoot OBR forecasts, given these very mechanically affects the budget headroom.

So I think, given that backdrop, if you look at the very long end in 30 year, I just don't see current levels, even though they're very elevated, offering much value, given this kind of term premium backdrop, but also there is just absence of structural investor demand. So I think the supply demand dynamics over the past few weeks in the summer have kind of alluded to the fact that the long end price action has been great. If you look at the 10-30 gilt curve, yes, it's steep historically, yes, it's steep on some relative value metrics.

But there are seasonal steepening dynamics in September. And I think, given my view, this fiscal issuance term premium uncertainty will remain very elevated ahead of the autumn budget, I think the risks are that the long end curve can steepen further from here. 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 Rates, JPMorgan's global research podcast series. This communication is provided for information purposes only. Please read JPMorgan research reports related to its contents.

Global Rates: Euro area and UK rate markets into the end of summer

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Global Rates: Euro area and UK rate markets into the end of summer

What the desk is arguing

Where it sits in our coverage

How other firms see it

Sources & References

Primary source