Global Rates: Mixed themes in European rates – Euro area sovereign spreads and France, seasonality in DM rates, cross-currency basis update and UK rate markets
The desk posits that the dynamics in Euro Area sovereign spreads, particularly concerning France, amid mixed themes in global rates markets point to a further convergence towards consensus rates expectations. Per the full note from J.P. Morgan, the effect of seasonal factors in developed markets is particularly notable as traders position for upcoming fiscal adjustments while assessing related cross-currency basis impacts. With current EUR/USD sentiment reflecting volatility around 1.1446, consensus targets of around 1.1700 seem feasible — albeit with a range suggesting differing views in the market’s appetite, as evidenced by recent firm forecasts.
What the desk is arguing
The desk argues that the mixed developments in European sovereign debt markets, especially for France, suggest volatility in the EUR/USD pair could resolve towards higher levels as seasonal patterns unfold. According to the J.P. Morgan commentary, seasonality in developed market rates is an essential facet to consider, and with fiscal policy on the horizon, adjustments could drive rates and currency positions higher.
Supporting this thesis are the recent adjustments in target rates from various banks, with entities like jpmorgan aiming for 1.1800 by March 2026. The anticipation around upcoming budget announcements in the UK could amplify these spread dynamics, influencing cross-currency basis as well.
Where it sits in our coverage
Our current consensus target for EUR/USD stands at 1.1700 with a range between 1.1200 and 1.2000. Notably, firms such as socgen and nomura have set March 2026 targets at 1.1700, suggesting a bullish outlook that aligns with our view.
This scenario positions our outlook consistently at the higher end of the target range, considering jpmorgan's upper target of 1.1800, indicating a strong expectation for upward momentum in this pair.
How other firms see it
A cohort of firms including ubs and barclays share optimistic perspectives, setting targets at 1.2000 and 1.1900, respectively, pointing towards a consensus for higher valuations in EUR/USD. Conversely, contrary views are held by citi, forecasting a more conservative estimate of 1.1300 for March 2026, suggesting divergence in sentiment.
As global financial conditions evolve, the trajectory of EUR/USD is likely influenced by the forthcoming decision of the European Central Bank around interest rate changes, as well as monetary policy shifts in the UK, which will serve as crucial indicators to watch during this period.
01European sovereign spreads, especially France, are impacting EUR/USD dynamics significantly.
02Seasonal adjustments in DM rate markets play a crucial role in current pricing.
03There is an upward consensus among major firms on EUR/USD projections, particularly around 1.1700 mark.
04Upcoming budget announcements in the UK could serve as a catalyst for further market adjustments.
Market implications
Traders should monitor the EUR/USD level approaching 1.1700 as a critical barrier. Should favorable data from the Eurozone or developments in fiscal policy arise, this could bolster the case for these positions to continue moving higher.
Risks to this view
A significant risk to this outlook arises if there are unexpected shifts in monetary policy from the European Central Bank that diverge from current expectations. Additionally, geopolitical tensions or economic indicators that point toward a slowdown in the Eurozone could lead to a reduction in EUR/USD valuations.
Hi, and welcome to At Any Rates, JP 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 Diamond, Head of European Rates Strategy at JP Morgan, and today I'm joined by several of my colleagues, Aditi Chaudhry, Kendrick Gupta, and Elisabetta Ferrara to discuss recent dynamics in euro area sovereign spreads, and in particular France, seasonality and DM rate markets, an update on cross-country basis, and UK rate markets ahead of the budget. But I think to start with, there's clearly been a lot of focus on the substantial widening in sovereign spreads in euro area this week, focused a little bit on Italy, Spain, but particularly France, with credit curves flattening over the past couple of days, and we now have the 10-year France-Germany spread widening for over 75 to 80 basis points since early August.
And given this upcoming budget discussion around some fiscal uncertainty, these moves are looking pretty stark. So Aditi, there's a lot of focus on these moves in euro area sovereign spreads, as I mentioned, particularly France. I mean, how do you explain the recent widening, and have French spreads now moved too much, do you think?
So, thanks, Francis. Yeah, like as you highlighted, and I think everyone has noticed, euro rates have had a very volatile week, and especially the intramural spreads, which are moving in quite large ranges, or ranges being the wrong word, I think, in just one direction, which is just widening, especially France, like the screens are just moving every time you blink. So yeah, a lot going on there.
If I just say anecdotally, what we have noticed is there's an ongoing large accreditations of overweight carry exposures, mainly in the front end, which in our view explains the bare flattening of credit curves during the recent spread widening move. So a lot of recent moves, in our view, is more technical in nature, because in the last couple of weeks, not much fundamentally has changed in politics or fiscal, which would warrant such large widening, or even large spread widening, not just in France, even wider. So there is a lot of technical factors at play, that I will just make sure I stress that at the starting.
As we've been highlighting in our recent publications, widening pressures across intramural spreads has been concentrated in weaker sovereign spreads over the past few weeks, while higher quality issuers have remained comparatively insulated. And this, in our view, reflects, like I said, resilient regional growth, which has been reinforced by the strong PMI we saw last week, the sharp rise in yields and high volatility in rates. The yields are coming down, but we did have a significant amount of sell-off in German yields before.
And also, the renewed caution in France amid expectations of choppy political news flow, which is the expectation it will stay this way going into the presidential election early next year. And lastly, and as I said, the main factor, technical and positioning headwinds. This week, the spread sensitivity of higher debt sovereigns to the level of yields even collapsed.
So at least in the last week, yields are selling off and the spreads are widening. But this week around, we are seeing a rally in broader yields, as the German yields are rallying a lot. But spreads are still widening, which, again, points towards the more technical nature of the move this week.
And in France, when we look at the sovereigns framework, where we compare macro fundamentals across countries and rank them on the fundamental scale, what we notice is that France is now trading more than 40 bases point two wide on this framework. Historically, France used to trade 20 bases, been expensive before 2024. But now it has been trading fair to small, cheap, since 2024.
But now it's trading more than 40 bases point two wide. Again, is there a level which goes too much? It's very hard to put a number.
Just to give you a context, like Italian spreads have traded on average 50 to 60 bases point two wide on this matrix between, let's say, the sovereign crisis and before the Maloney government came into power. Since the Maloney government came to power, this discount has declined quite a bit. But Italy has traded 50 to 60 bases point.
I'm not arguing anywhere that, oh, France should trade like Italy, because it's very hard to compare those two scenarios. But what I'm trying to say is that France can continue to trade on the cheaper side on the scale, given the fiscal and political challenges. But I think clearly, near-term, the technical factors has moved it a bit too much.
Also, it's the same thing which gets echoed from our client discussions, especially on the real money side, that investors agree that it's too early to position for the specific 2027 presidential election scenarios, and that the 2027 budget process may ultimately prove less noisy than feared. The news flow even recently, where Le Pen also is giving a sense that she might be willing to approve the budget, even if it's not a great budget. So overall, I think domestic politics-wise, not much has changed to warrant this.
But at the same time, the clients also mentioned that the expectation is that the French political headlines will remain choppy over the coming months. So in our view, this sort of feeling of that's being choppy, along with the ongoing volatility in broader rates markets, is continuing to keep investors cautious on France, despite increasingly attractive valuations. And we also stress that, and I continue stressing, position liquidations have exaggerated the recent moves.
So overall, it's very hard to put a cap on the level, but clearly we are getting into stretched territories. And outside France, we stick with our cautious stance on intra-EU and EURUSD spreads, as ongoing heightened DM rate volatility is keeping investors cautious. And in our view, a stabilization in global rates volatility might be needed for markets to refocus on carry exposures, and for cheapness of especially high debt-solving spreads to fully correct.
Okay, thank you for that. Sounds like it could be still somewhat challenging for the next few days, at least, in terms of evaluating these moves and spreads. So if we shift away from market moves this week, Elisabetta, you recently published a piece looking at seasonal patterns in government bonds.
Seasonality is normally a pretty popular topic for investors. So what are the main takeaways from your analysis? Yes, thanks, Francis.
Seasonality in bond returns is a widely held concept, as you said, in fixed income. But it's not easily demonstrated, as other macro trends tend to dominate the yield moves. So in our recent piece, we looked at bond returns of the JP Morgan government bond index across developed markets to assess whether we find any seasonality in Gobi returns.
The topic is particularly interesting at the current juncture, given the broadly held view that bond returns tend to weaken seasonally after the summer, around September, October, which could compound the recent set of moving DM rates. Our analysis finds that there is indeed some evidence of seasonality in Gobi returns across developed markets, especially towards the second half of the year, with more marked effects visible and significant in the US and Europe. The patterns we identified broadly align with the commonly recognized seasonal trends, which are generally associated with the issuance dynamics and market liquidity.
So we observe a general outperformance of returns in the summer months, especially in Europe. This is then reversed in September, October, where we see weaker bond returns across the AM, but especially in the US. And December also exhibits some seasonal patterns, particularly for long-end maturity packets.
And in the new space, we run a similar analysis, looking at the difference in returns of Euro-EDAC obvious relative to those of Germany. But we do not find compelling evidence of any seasonal outperformance or underperformance of Euro-Gobis versus Germany throughout the year. So overall, we found that while there is some seasonality in returns, we think it's quite hard to extract any reasonable trading signal from these patterns, as in specific years, other macro-related market drivers tend to dominate them.
Okay, thank you for that. Sounds like it could be something which is something to watch in the next few weeks, particularly in terms of level of yield, rather than spreads themselves particularly. So maybe we shift focus again, I mean, periodically, we take a look into cross-currency basis.
Kigendre, you recently published your latest quarterly update, and it looks like basis had been relatively range-bound over the past few months. Is that dynamic expected to continue, or are there any particular drivers we should be focused? Hello, Francis.
Yes. You know, amidst the heightened volatility that we have seen elsewhere in the DM rates market, cross-currency basis has exhibited a relative sea of calmness. They have generally been in tight ranges across DM, although there has been some divergences between pairs, specifically between JPY, USD, and the Aussie dollar, those two pairs.
As our listeners would remember, you know, we typically look at a PCA-based framework to analyze the full movement of DM basis. Usually the first factor explains a high percentage of variants indicating that globally basis tend to move in unison, potentially driven by similar factors. However, we noticed a change this time around.
On a YTD basis, the first factor now explains a meager, like, 45% of the total variants. This basically means that the traditional drivers of DM basis, basis which moves globally in a similar direction, are absent over the last few months. And thus, we decided to take a step back and analyze the evolution of typical factors which could potentially come back on impact basis.
So on this, what we note, what our view is basically that first, on the relative central bank pricing differential factor, I mean, the relative pricing has been moving, or the cumulative pricing for various DM central banks have been moving broadly in sync. And we don't really expect a large divergence over the coming weeks between the DM central banks. Now, in any case, I highlighted the beta of the basis to the cross-market yield differential is small.
So for a few bips of out or under performance of SOFR, for example, versus other markets, it's not going to have a big impact on the basis, in my view. Now, second, I think the evolution of Fed balance sheet may impart some local volatility. So while reserves in the US remain ample at around 3 trillion now, it is expected to decline somewhat to around, let's say, I think 2.9 trillion over the next few weeks as the PGA balance sheet is increased.
Now, this reduction will reverse later in the year, but we can't discount some local volatility on this temporary reduction in balance sheet dynamic. And finally, I think the cross-border issuance could have a bigger impact on basis. On this, as you know, the hyperscalers have ramped up their non-dollar issuance this year, and this is expected to stay elevated over the coming quarters.
Although I'm not sure how much will these hyperscalers issue in the fourth quarter, we do a detailed analysis of the typical hyperscalers and other big cross-border issuance and how these issuances are varied across different currencies relative to 2025 and 26. Now, in any case, all is equal. I think the expectation that the hyperscalers will still have elevated issuance next year should keep some widening pressure on the basis globally.
So I think these are the primary factors that will drive the basis over the coming months. Nevertheless, I highlight that for now, these factors are likely to themselves be relatively muted, and therefore we expect basis to remain range-bound, which is the main theme across the various PM pairs that we look at in our publication. Now, Francis, let's end this with an update on UK rates.
This week, we saw a key speech from PM Burnham outlining some major potential policy changes in the UK budget will be presented in a few weeks. Is there anything UK rates market should focus on? Yes, as you say, the Prime Minister did outline his long-term vision for the government in his address for the annual Labour Party conference this week.
He did outline a pretty major set of policy initiatives, wide-ranging topics, including social care, electoral reform in Europe. And yes, certainly a few are worth mentioning in detail, given there's been a lot of political focus, including reforming the state pension triple lock from 2030 onwards, and as well as shifting a new version that increases by the maximum of CPI inflation 2.5%, and then an adjustment to ensure the state pension keeps in line with average earnings growth. This basically would remove the ratchet effect in the current triple lock, with an idea that probably savings from ending this sort of from 2030 onwards, maybe over the next decade from 2030, would then pay for some new national care service.
He certainly opened the door for a revised relationship with Europe, and focused on the upcoming November UK-EU summit as a starting point for more of a debate on how this might evolve. So a lot of sort of big picture, big policy changes there, but to be honest, the bulk of those look like they're going to form part of the Labour Party's manifesto for the next election. Let's assume that's in 2029.
And the next few years, it seems like Bernie will be using that time to debate these various options rather than implementing anything concrete until after the next election, assuming Labour were to win. So to be quite honest, whilst this is very sort of politically interesting, the long-term aspirational framework here, I think, is very limited relevance for UK markets in the short term. I mean, you mentioned the budget, and yes, as we creep closer, obviously, market media commentators will try to sort of get a focus on what that means in terms of policy and market response.
Certainly, the increase in yields we've seen, although we've certainly pulled back this week, will have had an impact on reducing fiscal headroom from around the £23-24 billion level at the March budget to, let's say, somewhere close to £10 billion. Although visibility on this is limited, as you might actually get some offset from growth that's been stronger compared to the OBR forecast from last budget. So I think the sense we get when we listen to commentary from the Chancellor, Healey and PM Burnham, is a strong message about sticking to fiscal rules, acknowledging there's limited scope for increased fiscal spending.
So I'd expect the upcoming budget to partially rebuild some of this headroom to maybe around £15 billion level. As I think, to be honest, a fiscal headroom of less than £10 billion might provide a bit of an optical challenge for markets, and at the same time, probably the budget delivers a mix of very small-scale tax increases to help rebuild this headroom, and also some help to pay for some maybe very modest spending increases. But to be honest, I don't think the curve, when we look at sort of the shape of the curve in the UK, really should be pricing any increase in fiscal term premium.
As we've been highlighting, 10-year yields are really just reflecting the repricing of monetary policy expectations at the front end of the curve. I don't think there's anything here to really say that there should be an increased political premium priced over the next couple of weeks. And we continue to sort of take the view that over the medium term, the outright level of intermediate yields here probably looks quite attractive for longer-term investors.
So thank you for joining. Thank you, Aditya, Elisabetta and Kigendre. Thanks for listening and stay tuned for more updates on the fixed income space here on At Any Rate, J.P.
Morgan's global research podcast series. This communication is provided for information purposes only. Please read J.P.
Morgan research reports related to its contents for more information, including important disclosures. Top Right 2026, J.P. Morgan Chase & Co, All Rights Reserved.
This episode recorded on 2nd October 2026.
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