Summary
- ECB: Easing cycle nears end. The ECB delivered another 25bp cut in June, bringing the deposit rate to 2%, within its estimated neutral range. With inflation near target but growth risks rising, one final cut to 1.75% is likely this year in September before a long pause. Rate hikes may return in late 2026 as fiscal expansion boosts growth and inflation.
- Fed: Poised to ease as signs of labour market cooling should emerge. The Fed held rates steady in June, balancing political pressure and tariff-driven uncertainty. Policymakers are split, but with softer inflation and labour market signals, we expect 25bp cuts in both September and December, and further easing in 2026, targeting a 3.50% terminal rate.
- Bond yield targets: We keep our 10-year yield targets over the next 12 months at 2.75% in Germany, 4.20% in the UK, and 4.25% in the US. For now, we remain Positive on core EU, US and UK government bonds, favouring intermediate maturities for both resilience and income.
- Topic in focus: Gilt turbulence, opportunity amidst the storm. UK government bonds saw sharp yield swings on political and fiscal developments early July. Although political and fiscal risks persist, we expect the Bank of England to cut rates and lower bond yields within the next 12 months. We remain positive about UK government bonds. Also on UK investment grade corporate bonds, which remain resilient, with tight spreads and elevated yields providing a buffer against shocks.
- Opportunities in Fixed Income: In addition to core eurozone, US and UK government bonds, we are Positive on US Agency Mortgage-Backed Securities, US TIPS, and eurozone and UK investment grade corporate bonds.