Bond navigators: Rates rundown

Uncertain background; limited change

2026 has started with plenty of geopolitical noise, but surprisingly sovereign bond markets have remained steady through the first few weeks of the year. 

Geopolitics have dominated the headlines; from Venezuela’s political reshuffle, to renewed US pressure on Iran, and Trump’s revived bid to bring Greenland under US control. Yet, as they did for much of 2025, sovereign bond markets have looked through the drama and uncertainty, guided by the familiar TACO mantra (‘Trump Always Chickens Out’). In Europe, the return of heavy bond supply has generally been well absorbed by the market, while UK markets initially outperformed until Labour leadership speculation has once again knocked confidence in UK gilts. Japan also came into focus with the calling of a snap election, raising questions around fiscal direction and reform momentum, adding more significance to an already event-heavy start to the year.

With this backdrop, we’ve generally seen yields push higher and curves steepen across sovereign bond markets. Higher commodities prices, particularly oil and natural gas, have helped lift US, UK and European inflation breakevens. There has been some regional performance variation: Europe has broadly held up better (the Dutch pension reform story proving relatively softer than feared) relative to weaker performance from Japan and the US. Risk appetite in Peripheral Europe has remained resilient, with Spain and Portugal continuing to benefit from tighter credit spreads. France has been stronger as political noise receded, whilst Australia has struggled on softer domestic data.

Positive… but modestly

Within government bond strategies, we have generally been long duration for more than a year. We maintained this into the beginning of 2026, despite recent yield increases. In our view, while we will hold a strategic stance, we also look for tactical opportunities to alter this – recent examples including new issuance in Europe and Australia. Our views on curves are varied – when looking at the UK and Japan we think curves are more likely to flatten, with the reverse true in Europe. Cross market volatility is another area where we think investors can benefit – one example already seen this year being Australia outperforming the US.

Looking forward

Looking ahead, February brings meaningful data releases across major economies, with the key data centric theme for most central banks unchanged: Balancing tight labour markets against moderating inflation and uneven growth. With the exception of Australia, policy rates are widely expected to remain on hold, keeping central banks firmly in data‑dependent mode. The nomination of Kevin Warsh as the next Fed Chair also adds an extra layer of interest, with markets watching closely for any early signals on policy independence.

The start of 2026 has showed how resilient markets can be in the face of political noise, and February could show us three things: first, a slightly clearer read on whether disinflation is back on track; second, how resilient labour markets really are; and third, whether growth momentum is stabilising or slipping. Against this backdrop, the disconnect between political drama and robust economic fundamentals is where the additional opportunities may exist. We think this will continue to provide opportunities for active investors.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change. Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied.