Fixed Income

The US and Japan are in the same predicament: save the bond market or save the stock market? How this predicament will be resolved is the biggest global macro call of 2026-27. Plus: a new tactical trade is to go short AUD/JPY.

Our Portfolio Allocation Summary for February 2026.

Egypt’s underlying inflation pressures are much higher than the headline CPI numbers imply. Real interest rates have plunged. As such, domestic bond yields have stayed high for a reason. Steer clear.

The Fed will keep rates on hold in H1 2026, but dovish policy surprises are likely in the second half of the year.

US Treasury yields require a higher premium for both geopolitical risk and inflation risk, but higher bond yields are not necessarily bad for stocks.

The 10-year Treasury term premium is now competitive with Baa- and Ba-rated credit spreads. Even without term premium compression, duration carry trades could outperform credit carry trades in a low rate vol environment.

Mortgage spread tightening has run its course. Any further drop in mortgage rates will necessitate lower Treasury yields.

With the US unemployment rate and interest rate close to the ‘neutral’ u-star and r-star respectively, further Fed rate cuts risk pushing up inflation and long-term inflation expectations. This is bad for bonds but good for stocks. Plus, two new trades are: short TOPIX versus DAX; and short CAT versus SPX.

This morning’s CPI report signals that the worst of the tariff impact on inflation may already be in the rearview mirror.

Our Q1 outlook maps global growth, curve dynamics, and policy surprises, which we then translate to our recommended global fixed income portfolio allocations and trades.