Not flinching when others wince

The recent bond sell-off has pushed yields beyond medium-term fair value, creating attractive forward-looking opportunities in duration despite continued short-term pressure.

• US markets now price another 100bp of Federal Reserve hikes over the next year and cash rates above 5% for the coming decade, assumptions inconsistent with inflation swaps unless inflation remains permanently above the Fed’s 2% target.
• US real yields at 3% have lasted no more than 12 months in most instances over the past 35 years, while long positions accumulated by fixed-income managers have recently been liquidated after poor performance.
• Europe’s gas consumption is approximately 20% below 2022 levels, making storage at 60% of peak capacity less concerning; if TTF gas prices remain near current levels, inflation could peak at 4.0% in January before declining.
• The expected two further ECB hikes in Q4 and Q1 should be followed by no additional tightening beyond next spring, while French OAT spreads above 110 basis points reflect fiscal concerns and are at their widest since 2012.
• UK CPI could reach 5% in Q1, with almost 50% of wages indexed to CPI, but the Bank of England may deliver only two or three hikes over six months versus five priced by futures; the preferred position is long short-dated UK rates and short longer-dated rates.

Takeaway: The author favours duration and selective sovereign-spread exposure because global bond yields are at more than 20-year highs, while remaining cautious on the US dollar, France and the long end of the UK curve.