The Good the Bad and the Ugly for Rates in 2027

Long-end rates should rise through early 2027 as AI-driven productivity, fiscal deficits and war-related inflation pressure markets, before falling as inflation eases.

• The US 10-year Treasury yield is expected to rise from 4.9% to above 5.25% by the first quarter of 2027, with an upside cap at 5.5%.
• As inflation declines and the Federal Reserve can reconsider rate cuts, the US 10-year yield is projected to target 4.75% and settle around 4.5% to 4.75% later in 2027.
• A benign inflation outcome could lower the 2-year euro swap rate by about 50 basis points, while the 10-year rate remains firmer as global real yields rise; persistent inflation could push the 10-year euro swap rate above 4%.
• Eurozone bond spreads face fiscal and election risks, with France identified as the main fault line and a credible French consolidation plan required for relief in the first half of 2027.
• UK rates remain above fair value, while nearly €900 billion of Dutch pension assets are scheduled to transition in January 2027, supporting a structurally steeper 10s30s euro swap curve.

Takeaway: Investors should expect volatile rates markets through early 2027, with US and European long-end yields supported by fiscal and inflation risks before a possible decline as inflation moves lower; Dutch pension reform will add flow-driven volatility to euro swaps.