Government Bonds

Looking at the sharp moves in government bond markets in recent days, one would be forgiven for thinking we are seeing some level of forced selling that is pushing valuations lower.

Having initially expected central banks to cut interest rates in 2026, investors now face a hawkish pivot after the European Central Bank (ECB) hiked rates at its June meeting.

The conflict in Iran has driven a sharp repricing at the front-end of rates markets, pushing central bank expectations from cuts to hikes in a matter of weeks. While the reaction is understandable given the inflationary impact, the scale of the move has left front-end yields on a more attractive footing.

UK government bond yields have pushed higher this month as markets have digested a building political crisis, with the prime minister, Sir Keir Starmer, now set to face a Labour Party leadership contest following dire local election results on May 7.

News of governments achieving their budgetary objectives or borrowing less than market forecasts has been a rarity in the last few decades.

As Jerome Powell enters his final months at the helm of the Federal Reserve (Fed), market participants have been busy analysing the past speeches of his nominated replacement, Kevin Warsh, with the aim of forming a view as to how his hand is likely to be played.

One of the many unusual developments in financial markets last year was the decoupling between German Bunds and other safe haven G7 government bonds, most notably US Treasuries. Since the inception of the euro, it’s been quite a rare event that Bunds and Treasuries move in opposite directions for sustained periods of time.

After a week that saw 10-year Japanese government bonds (JGBs) hit yields not seen since the late 1990’s (and record highs for 30-year and 40-year maturities), alongside one of the most interesting Davos conferences in years, which was held in the shadow of the latest push by President Trump to “acquire” Greenland, it is helpful to take stock of where this leaves the global geopolitical landscape and financial markets.

With spreads well below long term averages and government bond curves pricing in what central banks are likely to do in the next few quarters, opportunities for capital gains through spread compression or sustained rallies in government bonds appear to be limited.

As we approach the end of a year that has seen risk assets shrug off US tariffs and mounting concerns over AI-driven tech valuations, TwentyFour Asset Management’s portfolio management team selects the seven key questions that they believe will define 2026 for fixed income investors.

As we begin the final stretch of 2025, market conditions appear challenging. Inflation remains sticky across a range of economies, preventing major central banks from enacting rapid rate cuts to support GDP growth.

Softer US economic data means the pressures on UST yields now look more balanced, but headlines around President Trump’s pick for the next Fed chair are just one reason investors should expect rates volatility to continue.