Global Rates: European Rate Markets – ECB meeting and European curves

Hi, and welcome to AT&U8, James Morgan's global research podcast series, where we take a look at some of the driest behind the biggest trends and themes across fixed income currencies and commodity markets. I'm Francis Diamond, head of European rate strategy at James Morgan, and today I'm joining my colleague, Kigendra Gupta, the discussure upcoming ECB Meeting, as well as curved dynamics in your area and the UK in light of the recent set off in the Emirates. So, Kigendra, let's start with the ECB, who widely expected to hike rates, 25 basis points at their September meeting, the market for the prices at hike, and then there's a cumulative 75 basis points of hike price for the middle of the next year, including expectations for the September meeting. So, what do you think we will see in terms of ECB rhetoric and forecast changes, and do you think the current market pricing is justified? Thanks, Francis. Now, market pricing of cumulative hike to be delivered by the ECB over the next few months has sharply increased over the last few weeks, and in my view, this basically reflects expectations of energy prices and especially TTF features prices staying elevated for a longer period of time. When we couple this with the robust growth backpropage that we're seeing in the euro area, this would suggest to speak your inflation, and that the ECB can go into modestly restrictive territory. So, for next week, I think, at 25 basis point of hike is a done deal, and maybe with modest upward revision to inflation forecast for next year, reflecting the energy dynamics that I was mentioning earlier. I think in terms of rhetoric, the ECB will continue to stick with its meeting by meeting, and data dependent approach, and reference from giving any strong guidance beyond that. This will basically be in line with what they have been doing for the past several meetings. You ask about the current pricing being justified or not. I think, you know, another cumulative 50 basis point of hike, so September and another 25 can be justified, given what I was discussing earlier on inflation and energy prices. And then maybe we can add another, let's say, a 10 to 15 basis point of the premium beyond that. So net net, I feel that the cumulative 75 basis point of hike price is probably maybe 10 basis point too high, but again, I'm not feeding these balls, given the uncertainty around at least, and of course, what's happening in the US as well. Okay, so let's shift focus to the curve in Europe. There's also been a lot of focus both in the major markets about the recent rise in long and yield globally, but how is the euro curve behaved in this move? Yeah, you know, your area yields have also rise into the multi-year highs. For example, like 10-year bond yields are around 35 currently, which was last we saw within 2011, I think. The euro swap yield are slightly better off in the sense like they're close to the level seen seen in 2023. When you remember, there was aggressive or segregated pain that had pushed swap yields higher and subscripts wider. Now, even though yields are optically high, we find them only modestly cheap. These are moves in bond yields as fully explained by change in monetary policy pricing. Additionally, I think the intermediate and the long end has also been driven by developments in the US and Japan. I highlight that US yields will continue to drive euro area yields in my mind, while I mean, while the beta could be weakening, it is still positive, and thus we have been looking for raised reposition for some retracement in bundles, but only via options and maybe versus cross-market versus trajectories. On the curve itself, I think the dynamic of the curve has been interesting. In the initial part of the war in the first few months, there are two-stance curve, for example, had exhibited a strong bear flattening, well-steeping dynamic. However, this relationship has weakened significantly over the past two to three months. I have a strong conviction on the curve will-steeping from here, but believe that this curve can continue to be choppy and stain a tight range in a bearish move, exhibiting basically very limited directionality. So, not so strong conviction on few stands going forward, especially in a in a cell-off. On the other hand, the long end of 10-30s curve has been exhibiting a very strong and consistent negative relationship versus yields over the last several months. We do have a steeping bias on the 10-30s curve, but the primary reflects our, you know, bullish duration bias. So, if we maybe just think about fox breads and the spite, the moves and the outright level of yields, germus fox breads have been pretty range bound with limited volatility. I mean, what do you think explains that and do you think this range trading in fox breads can continue? So, sprites have been remarkably stable and, you know, relatively immune to all the recent market drivers. For example, good sprites have moved in like a one or two basis point range over the past month, even though macro drivers such as the ECB pricing, yield itself, volatility, and in general broader risk sentiment have all shifted around a lot. As we've discussed in our right terms, you know, German substrates nowadays do not really act as a risk of instrument anymore. So, the interest from communities investing in German assets as a risk of, has limited, has been limited. They are now in my view driven more by technical factors, such as seasonality around swap issuance, for example, in a 10-year sector. But I think these technical factors don't really have the capability to push sprites out of them, out of their recent ranges, at least over the near term. I believe that this range trading dynamic will continue on for the next several months and investors should be more tactical in expressing swap spread views, you know, so expect small mules, especially in the front to the intermediate sectors. Now, our front is, you know, let's focus on the UK. There has been a lot of focus on 10-year and 30-year yield yields, which have reached multiple highs earlier in the week. Is there a UK-specific factor behind these mules? So, I think the simple answer is no. I don't really think the recent sale of 10-year or 30-year is just UK idiosyncratic factors. I mean, it's very mind we have seen front and yields rise, whether they have subsequently retraced recently, in the last day or two, with the sell-off reflecting increased beer rate, high expectations given an inch price dynamics, and particularly the rise in UK natural gas, which is well above the levels in the start of the Middle East War. And that broadly mirrors what we see in front and break. So, part of the intermediate yield move is this front end move. If we then look where we are in terms of 10-year itself, I mean, yes, it did reach the highest level since 2008, just above 5.2% earlier this week, full rallying back to around about 5.10. And I do think there are global factors here in the intermediate sector. I mean, if we look at our model, 10-year yield do look slightly cheap, relative to the moves in front end yield. So, they have slightly underperformed in the subtle, and adjusting for move in 10-year treasury yields as well. But there is a very strong correlation in intermediate sector between UK and particularly US yields. And I think that's strong directionality can persist, particularly in the short term. As we go through the US inflation data, we have the US treasury long-end buyback operation as well. I think some of these factors can just a bit over continue to drive the intermediate part of the UK curve. I mean, as you mentioned, yes, there's been increased media focus on what the impact of high yield will do on physical headroom. Clearly, that's becoming more relevant as the October, late October budget approaches. And probably, if you just took a snapshot of yields now, relative to where they were at the last budget. And if you were to put that through, I guess the OBR sort of forecast numbers, probably the overall budget headroom has come down from the 22 billion or so in the last budget to roughly around 13 billion. So mechanically, there's an impact, but I don't really think what we see in terms of the move in UK yields is a really a physical story. We're reprising a physical expectation. And we can kind of see that as well if you look at the curve. I mean, a 2010 skill curve that's flat and modestly over the past couple of weeks. Again, when we look at the models, probably, it's a little bit too steep when we adjust for level of front and rear rates and the US treasury curve. And yes, that's what relative thickness having increased slightly, but I think that there's a lot of moving parts here. We've seen a decline in the strength of the direction out of the UK curve, the front and rear rates and increase in the direction out of the UK curve to the dollar curve. So I think some of this, this sort of relative sweetness, as I said, it's very modest. Maybe reflect some more of these global factors. It may be reflects this kind of shifting sensitivity of the UK curve to the dollar curve and maybe the background, sort of underlying factors here around sort of increased growth, resiliency to the energy price. Shock just higher real interest rates globally from some sort of potential hyperscaler clouding out of issuance, maybe increased uncertainty given a more activist US treasury. I think all of the combining to sort of drive global intermediate rates rather than looking at so the UK and saying there's clear dislocation for drivers from a pure UK fiscal standpoint. So again, similar to what I mentioned for 10 years, I think probably we could see ongoing sort of choppiness in the dollar curve. as we go through the next couple of weeks, filling over into the sterling curve and maybe we still need to get a lot closer to the UK budget before we're really trying to assess whether there's any change in sort of the UK fiscal risk uncertainty. So that's all from us. Thank you for listening and stay tuned for more updates in fixed income space here at any rates. Change of Auckland's global research podcast series. This communication is provided for information purposes only. Please read J4 from research reports related to its contents, more information, including the falls of the disclosures. Copyright 2026, J4 Morgan Chase & Co., all rights reserved. This episode was recorded on the 4th of September 2026.