The desk posits that the current dynamics in developed market (DM) swap spreads are influenced by a convergence of monetary policy expectations and market positioning. Per the full note from J.P. Morgan, the team highlights that recent shifts in central bank rhetoric, particularly from the Federal Reserve and the European Central Bank, are pivotal in shaping these spreads. The desk notes that swap spreads have tightened recently, reflecting a recalibration of interest rate expectations. This trend is underscored by the current consensus target of 1.075, suggesting a stable outlook amid potential volatility ahead.
What the desk is arguing
J.P. Morgan analysts highlight that DM swap spreads are being driven by diverging monetary policy paths across major economies and increased hedging activity from asset managers. They expect spreads to widen modestly as central banks synchronize on rate cuts, but with idiosyncratic risks in each market.
Where it sits in our coverage
Our internal consensus aligns with a neutral-to-wider view on DM swap spreads, with a firm spread of 2-5 bps widening over Q2. We see the US as the key driver given its lead in the rate cycle.
How other firms see it
goldman-sachs: Expects slight narrowing on the back of better liquidity.
morgan-stanley: Flags upside risks from fiscal supply.
deutsche-bank: Warns of fragmentation risk in Eurozone spreads.
How firms align with this view
consensus5.0000range2.0000–8.0000
Key takeaways
01DM swap spreads likely to widen moderately as central bank rate cuts converge.
02Hedging activity from asset managers remains a key demand driver.
03Divergent fiscal and monetary policies create idiosyncratic risks across jurisdictions.
Market implications
A moderate widening in swap spreads implies higher hedging costs for corporates and banks, potentially dampening fixed-income issuance. It also signals improved pricing of credit risk, which could benefit short-volatility strategies.
Risks to this view
Faster-than-expected central bank easing could compress spreads, while a resurgence in inflation or fiscal slippage could trigger sharp widening. Liquidity dislocations in specific tenors also pose tail risk.
Hi, and welcome to At Any Rate, JP Morgan's global research podcast, 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 Kriyagendra Gupta from European Rate Derivative Strategy at JP Morgan, and today I'm joined by my colleagues Ipek, Francis, Akifumi, and Ben from rate strategy teams in the US, UK, Japan, and Australia, respectively. We are recording this podcast on 19th March, and our comments today are based on our published research available on JP Morgan markets.
So let me begin by noting that different factors have dominated swap spread market dynamics over the past few months, and of course, across jurisdictions. Nevertheless, developed market swap spreads have a tendency to move in tandem, even though the cross-correlation has somewhat declined over the past few months. What we do is we typically run a PC analysis and look at the percentage variance explained by the first component to check how much of the overall correlation is explained by the first factor.
We see that this component has declined sharply over the last few months compared to, say, the first few years, past a few years before mid-2025. We find that overall, DM swap spreads are typically explained by the evolution of central bank policy rate expectations and dynamic that we expect to continue over the coming months. We also observe that across jurisdictions, technical factors have played and also likely to play a dominant role, especially at the long and ultra-long end of the curve.
Now, with that brief introduction, let's chat with the experts in the respective markets to get their bottom-up view on swap spreads. Ipek, let me begin with you. I have noticed that in the US, swap spreads have behaved very differently in the first month of the year versus the second month.
Why is that the case, and what's driving that difference? Yeah, so that's right, Kagan, and I guess in the first month or so of the year, long end spreads widened significantly in the US, or I guess I should say that they continued their widening since last year, while front end spreads remained relatively range-bound and the spread curve steepened significantly. So the reason is, like, the first month or so was a very low volatility environment, and we were looking at deliberate vol of one to two basis points on a daily basis in yields when in swap spreads, and implies were coming down.
So that made swap spread wideners an attractive carry-seeking strategy, and these positions were mostly concentrated in the long end. But then, you know, the weeks following January were a completely different story. So first we had AI-related concerns, which resulted in risk assets to sell off, which resulted in increased volatility, and now we have the Iran conflict, which has resulted in even more volatility in the markets.
So all of this have pushed swap spreads narrower, and, you know, swap spread curve to flatten significantly because it makes, you know, risk-to-reward much less attractive for such carry-seeking strategies. So how do we take this forward? I mean, what's your outlook for swap spreads over the next few months, and what factors do you see impacting US swap spreads?
Yeah, so if I look at our empirical model, almost all drivers are likely to remain stable for the next few months. So it is, from that perspective, it is a little boring, but my, like, the geopolitical risk backdrop is what's driving the curve flat right now, and valuations, like the curve just looks too flat with respect to our estimate of fair value. We were, as of yesterday, we were above, like, two standard deviations above our estimate of fair value, highest it has been in some time.
So our outlook for the next few months is basically just waiting for the curve to normalize and to steepen from current levels, but we also recognize that the geopolitical backdrop poses significant risk to this view. So again, let me turn this around to you and switch focus to German swap spreads. I have noticed that the volatility in German swap spreads has sharply declined over the past few months.
What's your take on that? Yeah, you know, like you mentioned earlier for the US, German swap spread volatility has also declined a lot over the last few months. When I say last few months, I mean, I'm skipping the last couple of weeks where there has been some pickup in volatility since the Middle East conflict began.
And this low volatility has been more relevant in the sub-10-year sector, which has remained very, very stable. In my mind, this reflects a few things, you know, first, funding rates, which are a dominant driver for front-end spreads, have been very stable over the past few months with German repo somewhere around the deeper rate. Now, looking ahead, we estimate that funding rates are likely to remain stable for another, you know, 750 to 1 trillion reduction in excess liquidity, which is occurring in my mind over the next 18 months to 24 months.
So for now, this is just stable funding rates and the stable spreads. Second factor that has driven, that has kept volatility muted until now, and somewhat interestingly, we have noticed that German swap spreads are not really acting as risk-off assets anymore. The relationship between German swap spreads and risk-off metrics, such as peripheral spreads, ROAS, volatility, is largely non-existent now.
And also the beta of swap spread to German yields has been very, has been small and relationship very weak. So together, all of this put together in a sub-10-year wall has declined. There is some volatility at the long end, however.
So Buxel, which is a 30-year German spreads, has narrowed several bits in the last few weeks and it has whipped around, you know, so in like a few basis points over the last few weeks. This has been primarily driven by the unwind of 10-30 swap curve steepness and the long Buxel spreads that were crowded positions on the back of Dutch pension fund transition-related flows. And the recent sell-off has flattened the curve and narrowed long-end spreads.
Got it. So it looks like the drivers at the front end is mainly funding rates, and that is unexpected to change much in your view. So then what are your main views for German swap spreads?
Well, like I said, front-end spreads are likely to stay in a tight range. We think Schatz-Ester spread is likely, is going to stay between minus 8 basis point to minus 12 basis point. Now I want to bar these knee-jerk moves that we see, that we've seen a couple of days this week on the Middle East conflict.
I put outside of this, I'm pretty confident the range will hold. We do have some modest widening bias on Bund spreads. We do have a strong medium-term conviction on wider Buxel spreads.
This basically reflects, you know, continued impact of ongoing Dutch pension fund transition-related flows. There's a lot of that to still to come in 2026. We find the valuations currently to be very stretched, and also from a technical factor, some medium-term impact from the upcoming Solvency II changes as well, that is kicking in towards the end of this year and early next year.
But together we believe that soft spread curve steepness, you know, like Schatz, Buxel or Bund-Buxel are attractive in Germany. So let me switch to Francis and discuss UK spreads. Francis, do you expect the Bank of England balance sheet reduction have an impact on front-end swap spreads, or is it the evolution of front-end rates given the recent repricing of Bank of England expectations being more relevant?
Yeah, so as you say, the usage of the BOE's short-term repo facility and the index long-term repo has increased, but I think this is pretty much expected. It's offsetting partially the decline in reserves as the size of the balance sheet is continued to fall. And when you look at total BOE repo facility usage, it is now at historic high levels around 170 billion.
However, I think as collateral becomes more abundant, actually these facilities are providing access to cash, it's providing a source of additional liquidity reserves, start to fall close to the expected minimum reserve required level. And I think this does prevent any persistent repo driven narrowing of front-end spreads. Although, as we've seen around quarter-end and year-end, I think there's still potential for some spiky sort of short-term repo moves, but I just don't think there's a thing persistent here as a medium-term driver.
But I'd actually definitely say at the moment it is the evolution of front-end yields and the repricing of BOE rate expectations is much more important as a driver of front-end swap spreads. At the time of recording, the front-end of the MPC OAS curve is pricing 60 basis points of tightening. And I think we are just seeing front-end spreads react to shifting expectations around the central bank reaction function, given the ongoing conflicts and particularly the more recent spike in gas prices again.
And I think this tightening financial conditions probably means swap spreads are just reflecting the increasing yields. I think this is probably going to stay more relevant as a driver and potentially keep front-end spreads more elevated as visibility around the conflict is becoming less clear. And we are looking maybe at an environment in which the Bank of England is shifting towards tightening policy in the near term.
But I think, yeah, this is much more relevant to drive front-end spreads. And how about further out the curve? What do you see as the main drivers for 10-year swap spreads over the coming months?
And do you think the domestic political risk premium can come back into focus? So if you look at valuations, look at our models, I do think 10-year swap spreads do screen 10 basis points or so too wide when we adjust for high-frequency drivers such as the slope of the money market curve, the level of yields, volatility, and adjusting the size of the BOE balance sheet. Although it is notable that that last factor, the size of the BOE balance sheet, has become less relevant over the past year or so as a driver of 10-year swap spreads.
So I think the starting point is valuations probably do suggest 10-year spreads are trading a bit too wide. And I think definitely the geopolitics and the repricing of BOE rate expectations is a focus for investors at the moment. But I do think as we roll towards the late spring and the May local elections, I do think there is a risk that markets again in the UK shift back to domestic political uncertainty.
And maybe we see additional political risk premium and fiscal risk premium starts to get priced back into the intermediate part of the swap spread curve again. Given current polling, it does look like the Labour government could suffer a large loss of council seats. And I do think that makes the potential of a leadership contest that could run over the summer reasonably likely.
But as I said, that's not the focus for now. Clearly, geopolitics and sort of rate expectations are where markets are looking. But I think as we evolve over the next couple of months, I do think there's a chance that markets can price in increased political uncertainty, the possibility of maybe additional fiscal easing if there were to be a new Labour leader and potentially a new chancellor.
So given that and the relative valuations, I do think the bias here is for some degree of narrowing in 10-year swap spreads over the medium term. Thanks, Francis. So let's keep going east.
Takafumi, you have been keeping a tightening view on GPY swap spreads, especially in the long and super long end. So what is the narrative in this view? Thank you very much, Alka, Andrew.
The swap supplies have narrowed modestly year to date, and the curve has also flattened. At the end of last year, the spreads widened following the announcement of reduced super long bond issuance, but they quickly retraced as Prime Minister Takaichi called a snap election and floated a temporary consumption tax cut. Since the election, the spreads have remained mostly stable and the market is currently range-bound.
There are for the time being that we don't expect any major moves, but fiscal concerns are likely to become a theme again. Recently, subsidies for gas prices have been decided, and there is a possibility that subsidies for electricity and gas will be introduced in the near future. If blanked, the state's $100 gas subsidies alone would cost over 2 trillion per year.
In addition to these energy-related factors, there are persistent concerns about fiscal deterioration, such as investment in growth sectors that Takaichi is most focused on, consumption tax cuts, increased defense spending, and rising JGP coupon payment burdens. We think it is highly likely that premiums for these fiscal concerns will be priced into the swap spread market. The long-end 10-year also remains a challenging tenor, given the auction schedule, the impact of the BOJQT, and net issuance in the 10-year sector is expected to be large.
The changes in the maturity basket in liquidity-enhanced auctions are also expected to increase issuance in the 10-year sector, adding to supply-side concerns. In the super-long-end sector, supply demand is essentially poorer, with support coming only from rebalancing by foreign investors and the RGP-IF. Both the long- and super-long-end sectors are likely to continue facing supply-demand concerns for JGPs.
Okay, so basically a continuation of the current dynamics is likely to keep pressuring spreads narrower and I suppose spread curve flatter. Now, if I look at risks, what factors or events would cause, in your mind, JPY swap spreads to widen from here, for example? The worsening situation in the Middle East has increased the risk of global recession.
If the outlook for BOJ rate hikes were to suddenly recede, not due to political pressure, but because of an actual economic downturn, domestic banks could rapidly buy sub-10-year sector JGBs. In that scenario, the swap spreads and the absolute 10-year sector could widen significantly. However, for now, this remains just a risk scenario.
Okay, thanks, Takafumi, for that. And finally, Ben, thanks for your patience in waiting. Let's talk about the Aussie spreads.
I have noticed that you've held a widening view on the Aussie swap spread curve, particularly in the longer tenors, but you've turned neutral recently. What are the catalysts for this change in view? Thanks very much, Kigandra.
So, yes, since late last year in our outlook publication and then through early this year, we thought that a combination of largely cyclical but also some supply-based factors would be driving widening. The swap spread curve in Australia does have a fairly directional component, tends to move counter to the underlying. And so with the RBA hiking, broad curve flattening, which has been really consistent in the cash space for six months or so now, that does tend to widen and steepen the swap spread curve because local banks in particular have to manage their hedge position and their security holdings through that business cycle.
Credit growth and the housing market as well have been really strong in the second half of last year. So that's an additional force supporting local banks' asset-swapped HQLA demand. They tend to grow their bond holdings in line with their total assets.
So that's the demand side. And then on the supply side, we also felt the AOFM, the sovereign issuer, was probably going to revise down its issuance plans, given how fiscal outturns have been tracking. So I'd say that the story in terms of those catalysts, most of them have all played out now.
It's just more mature. So they've either played out or there's less upside from here. So we turned neutral in recent weeks as the 10-year swap spread in particular was close to our peak forecasts in moderate positive territory.
Okay, so as a follow-up then, now what are the potential X factors to be watching which could prompt either widening or narrowing in Aussie spreads from here? I think on the narrowing side, the dominant risk we think domestically is just that cyclical factor that I mentioned before could start to turn. So we are seeing the data starting to lose some steam after what's been a pretty significant cumulative repricing of rates.
And RBA terminal looks high to us. So a sudden shift in the cyclical sentiment and the outlook there that drives an outright rally. If you were to get that, swap tends to lead that process, which would generally be a narrowing impulse.
The other narrowing factor is, of course, the global common factor in swap spreads, which has been a little bit less influential for Aussie lately. But we think, given fiscal concerns elsewhere haven't exactly gone away, if that were to resume, we don't think Australia would be immune from that. On the widening side, credit spreads globally have seen some vulnerabilities lately.
And Australian swap spreads do have some leverage to that, given that they're still referencing an unsecured LIBOR-like reference on the swap side. So credit spread widening would be a factor. And the other last thing we're looking out for is the RBA's QT process is quite fast.
Reserve contraction is going to be quite material this year. From our modelling of reserve demand of banks, we don't reach the steep section of the reserve demand curve this year. So we don't see any rotation from bonds to reserves that would be a catalyst for cash underperformance.
But that's still a space to watch because the QT process is quite fast on paper. OK. Thanks, Ben.
And thanks to all our speakers for your time today. That's all from us. And thank you listeners as well.
Stay tuned for more updates on the fixed income space here on At Any Rates, JP Morgan's global research podcast series. This communication is provided for information purposes only. Please read the JP Morgan research reports related to its contents for more information, including important disclosures.
Copyright 2026, JP Morgan Chase & Company. All rights reserved. This episode was recorded on the 19th of March, 2026.