Government Bonds

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.

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.

While tariffs have done meaningful damage to the economic outlook and raised volatility in rates markets, the softening of the US stance has restored confidence in credit returns for 2025.

“Liberation Day” has landed, and not with a whimper. In extraordinary scenes in the Rose Garden of the White House, President Trump held up a board outlining the level of tariffs the US will impose on countries around the world, and in most cases they were worse than worst-case expectations.

The relationship between government bond yields and swap rates – otherwise known as the swap spread – has been increasingly in focus, with the market’s attention turning to Europe last week as the 10-year German Bund yield traded higher than the 10-year euro swap rate for the first time ever.

Market attention in the government bond market has rapidly turned from central banks holding rates “higher for longer” to the potential for “lower and sooner".

There is little disagreement among investors and economists that the last few years have been highly unusual in many respects. An inflationary shock in developed markets, one of the fastest rate hiking cycles on record, the worst year in decades for government bonds (2022), and mild recessions with no movement in unemployment are just a few of the dynamics that have strayed from recent norms.

Felipe Villarroel takes a look at how inverted government bond curves are at the moment and how previous episodes of normalisation have unwound, as curves normalised, exploring the possibilities of how the unwinding process could happen and how long it could take.

With 2023’s rally halted by the Fed’s hawkish messaging, Felipe Villarroel questions whether markets read the recent jobs data correctly and looks at what it means for terminal rate expectations.

With many market participants fearing the impact of quantitative tightening (QT), Johnathan Owen looks at one central bank’s early experience of actively selling bonds to investors.