Global Rates: Summer thoughts on European rates

Global fixed income markets currently face significant volatility driven by the re-escalation of US-Iran tensions and subsequent energy price fluctuations. The European Central Bank is expected to maintain its policy rate at the upcoming July meeting while retaining a data-dependent, hawkish stance to mitigate potential second-round inflation effects. Current market pricing for cumulative rate hikes appears excessive, suggesting that 10-year German Bund yields will likely remain range-bound. In the United Kingdom, the incoming administration’s fiscal strategy remains the primary focus, though specific policy details are not expected until the autumn budget. Consequently, the choice of chancellor holds less significance than the broader fiscal policy mix. Given the geopolitical backdrop and elevated energy risks, a cautious approach to carry exposures and intra-EMU spreads remains prudent, as the market continues to exhibit strong positive directionality between European and UK intermediate yields.