Fixed Income Focus April 2026

Summary

1. The Fed on hold this year: The March job report was solid, while the risks for inflation are tilted to the upside. We do not expect further Fed rate cuts this year.

2. ECB not expected to hike this year: We are not yet seeing second-round effects, nor signs of de-anchoring in inflation expectations. Therefore, we continue to expect the policy rate of the ECB to remain unchanged this year.

3. Opportunities in core eurozone govies: Positive stance on core eurozone govies. We favour maturities of 7-10 years.

4. Opportunities in UK bonds:  Positive stance on UK government bonds: We keep our target on 10-year UK government bond yields at 4.30%.

5. Selective opportunities in corporate bonds: We prefer EUR and GBP IG corporate bonds (Positive view) over USD IG bonds (Neutral view).

6. We keep a negative stance on corporate high yield bonds. For fallen angels as well as rising stars, we keep a neutral view:  Current spreads do not remunerate for the underlying risks. Even if recession risks remain low, they are still higher compared to the environment before the Iran strikes.

7. Neutral view on emerging market bonds in local and hard currency: We see less potential for USD weakening is not supportive for this asset class. The risk premium is not sufficient at this stage.

Central banks

Monetary authorities should look through the rise in headline inflation

European Central Bank (ECB)

The ECB has adopted a cautious but increasingly hawkish stance following the beginning of the Iran conflict. While initially emphasizing the duration of the energy crisis and impact, recent signals suggest a shift toward acknowledging the risks of persistence.  ECB President Lagarde’s latest comments lean more hawkish, warning of longer-lasting supply chain disruptions and gradual economic slowdown. The key will be to monitor second-round effects as companies could pass on energy cost increases and wage negotiations could add further pressure. At this stage there are no signs of such developments. The situation is very different compared to 2022. At the time, the ECB started hiking rates after the Russian invasion while inflation was already at 6%. (see chart below).

Outlook: The balance of risks has turned less favorable, but we are not yet seeing second-round effects, nor signs of de-anchoring in inflation expectations. Therefore, we continue to expect the policy rate of the ECB to remain unchanged this year. 

US Federal Reserve (Fed)

The FOMC minutes were largely in line with expectations, but they highlighted the emergence of two‑sided risks: upward pressure on inflation and a weakening labour market. Comments from the April Fed meeting also revealed a more symmetric bias in the Committee’s outlook. Unemployment remains near historic lows, yet recent job‑creation data show early signs of softness, a trend that is reinforced by both business‑ and consumer‑survey results. Meanwhile, the upside risk to inflation has risen sharply: energy prices have increased, and inflation expectations have moved higher. Despite this, long‑term inflation expectations remain anchored (i.e., relatively stable).

Outlook: The March jobs report was robust, indicating that labor‑market concerns have eased slightly, while the inflation outlook has clearly moved to the upside. Consequently, we now expect that the Fed will not implement any further rate cuts during the remainder of the year.

Topic in Focus

Has the German sovereign bond yield reached its peak?

In recent weeks, the yield on the German 10-year sovereign bond has rebounded sharply, temporarily exceeding 3.10 %. This move appears mainly attributable to a significant rise in inflation uncertainty, amplified by the Middle East crisis. The bond yield can be broken down to separate the component linked to expected inflation from the real component (i.e., purchasing power adjusted), which depends on the economy’s potential growth. The real component is measured through inflation linked bonds: these securities pay a real coupon plus the inflation actually realised over the period. For example, such a bond may provide a 1 % annual coupon together with the observed inflation.

At the beginning of April, the real yield to maturity of a German inflation linked sovereign bond with a 10-year horizon was around 0.6 %. By contrast, a nominal (non indexed) bond offered a yield of roughly 3 %. The 2.4 % spread  (breakeven inflation) therefore reflects, at first glance, 10-year inflation expectations However, this simple difference can be biased by other factors, notably a premium related to inflation uncertainty and some liquidity premium.

We anticipate a de escalation of the conflict in Iran and a fall in oil prices to around $80 per barrel. Damage to energy facilities in Iran and neighboring countries, however, will prevent a return to pre conflict levels (about $70). Consequently, European inflation will continue to rise in the short term, but we consider it unlikely that companies will broadly pass higher energy costs on to their selling prices. Likewise, a generalized wage increase seems improbable. Hence, a persistently high inflation scenario appears unlikely.

Even if the conflict intensified and oil prices rose sharply, we do not envisage inflation remaining elevated over longer period. In that case the ECB would be forced to raise its policy rate sharply, triggering a recession in the euro area. The resulting marked slowdown in activity would eventually act as a natural brake on inflation. In both scenarios, long term inflation expectations of 2.30 %–2.40 % seem excessive. 

Government Bond yields

Buying opportunity in the eurozone and UK

Buying opportunities in core eurozone long-dated bonds: We saw the 10-year government bond yield in Germany breaking temporarily the 3.10% level. The yield fell back to 3% by mid-April. This is still well above our forecast of 2.75%. We do not expect core inflation to rise durably. The recent move in breakeven rates seems exaggerated (see previous page). We favour maturities of 7-10 years.

Positive stance on UK government bonds: We keep our target on 10-year UK government bond yields at 4.30%. We thus keep a positive recommendation. Indeed, the yield has been hovering around 4.80% over the past few weeks.

Neutral stance on US government bonds: The 10-year Yield in the US has been hovering in a tight range 4.25-4.30%. Inflation expectations as measured by the breakeven inflation, remain were quite stable. US Treasury yields will probably remain biased to the upside over the coming year, due to the risk of increasing sovereign debt. We keep a target of 4.25%.

Selective Opportunities in Corporate bonds

We see opportunities in Investment Grade Bonds in the EUR and GBP   

Positive view on Corporate investment grade bonds:

Spreads on both investment‑grade and high‑yield corporate bonds have receded to levels that are close to – and in some cases even below – those seen before the strikes in Iran, particularly in the United States. We continue to expect a gradual de‑escalation of the conflict, with the fighting likely to be measured in weeks rather than months. This outlook reflects not only an assessment of Iran’s military capabilities but also the potential political and economic fallout a protracted war would generate worldwide. A rapid return to the “Goldilocks” macro‑economic environment that prevailed a month ago now looks unlikely. In addition, structural damage to energy infrastructure has probably already taken place, making it improbable that Brent crude will fall below $80 per barrel. Given the current supply dynamics and the prevailing spread levels, we maintain a positive view on EUR‑ and GBP‑denominated investment‑grade corporate bonds, while we remain neutral on USD‑denominated investment‑grade bonds. Our focus remains on high‑quality issuers.

Caution on Corporate high yield bonds

As mentioned earlier, spreads have retraced the rise that followed the cease‑fire announcement—a surprising development, given that there is no clear evidence the conflict has actually ended. Current spreads no longer compensate investors for the underlying risks. Even though recession risks remain modest, they are still higher than they were before the Iran strikes. BB‑rated spreads are especially low by historical standards. In addition, the high yield‑to‑investment‑grade spread remains compressed and does not reflect the heightened risk environment.

Last month we downgraded corporate high‑yield bonds to a negative outlook and moved both fallen‑angel and rising‑star issuers to a neutral stance.