Following post–Liberation Day anxieties, market volatility eased in the latter half of last year, setting a constructive tone for the start of 2026. Against a backdrop of resilient global growth, we are evolving the curve and duration positioning of our global government bond portfolios in line with our expectations for a divergence in global monetary policy.
Stable growth and easing inflation
The global economy remains on a resilient, above-trend trajectory, with consensus forecasts suggesting steady GDP growth. This positive outlook is underpinned by robust corporate capex (especially related to investments in artificial intelligence and data infrastructure), easier financial conditions, and front-loaded fiscal stimulus.
The US is expected to grow around 2.4% (real GDP growth) this year, supported by fiscal and tax measures. The labour market remains a key area of focus, as the adoption of artificial intelligence and corporate cost discipline act to dampen job growth, although conditions remain relatively stable. Elsewhere, the euro area is expected to accelerate through the year as German fiscal spending ramps up and earlier policy easing takes effect, while China’s export-led momentum is projected to anchor global goods prices, even as domestic demand remains subdued.
At the same time, inflation data continues to ease, with core inflation expected to converge towards target levels by year-end in most developed markets, as underlying cost pressures—excluding tariffs—remain subdued. China continues to export disinflation, helping to restrain goods prices worldwide. In the US, wage and rent pressures are easing, and energy prices are stable, contributing to contained inflation trends. In Europe and the UK, inflation is also expected to be near or below target. By contrast, Australia’s inflation rate remains persistently high.
Monetary policy divergence and positive tailwinds
Against this growth and inflation backdrop, monetary policy is set to diverge across regions. The Federal Reserve is expected to deliver additional rate cuts, particularly if labour market slack persists or inflation undershoots. The ECB is on hold, but with a tilt towards further easing, while the BoE also has a bias towards rate cuts. By contrast, the Bank of Japan and Reserve Bank of Australia look more hawkish and both could surprise with rate hikes. This monetary policy divergence is likely to drive cross-market volatility and create opportunities for selective duration and curve positioning.
Amid ongoing fiscal support and expectations for interest rate cuts, policy efforts in the US are focused on keeping long-term yields contained. Tariff rollbacks, Treasury supply management and initiatives to support housing affordability are among the measures being deployed to maintain easy financing conditions. US 10-year yields are expected to trade in a range, with a front-loaded rally possible as rate cuts are delivered and if labour data weakens, while yields would be expected to drift higher if growth momentum rebuilds. Along with these supportive market dynamics, positive carry and the return of negative (“right way”) correlation with risk assets should help provide further tailwinds for bonds.
Portfolio positioning
From a portfolio perspective, we remain constructive on duration, favouring the five- to 10-year sectors and maintaining a bias towards curve steepeners in the eurozone. From a relative value perspective, we favour the UK over Japan and core euro area markets, and within European spreads we prefer Spain and Italy over the core markets (Germany and France).
We are most constructive on UK duration, where limited fiscal loosening is expected to keep GDP growth subdued and further contain inflation. The UK consumer price index is projected to trend lower through 2026 and the Bank of England is likely to cut rates gradually as inflation approaches target levels.
The outlook for Japan, on the other hand, is characterised by above-potential growth, a tight labour market, moderating but persistent inflation, gradual monetary tightening, and increased fiscal activity. The Japanese Government Bond market is likely to remain highly responsive to policy changes and fiscal developments, underpinning our cautious outlook. We continue to monitor policy developments, supply calendars, and legal headlines, maintaining flexibility to adapt positioning as market conditions evolve.
Overall, the outlook for 2026 is positive, with resilient growth, contained inflation, and supportive policy settings creating a constructive environment for fixed income investors. Our strategy remains focused on capturing carry, managing risk through active duration and curve positioning, and seeking relative value opportunities across global markets.