Fixed income outlook: ECB dovish, French credits, gilt volatility (with Anna Edwards, Lizzy Burden)

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Alexandra Ivanova 7.0

Fixed income outlook: ECB dovish, French credits, gilt volatility (with Anna Edwards, Lizzy Burden)

yields

In 2026, risk scope for Treasuries is to slightly underperform and curve to steepen more than other government bond markets. Expects curve steepening (long-end yields rising relative to short-end) due to fiscal concerns, potential inflation return, and Fed independence risks.

9 calls

-1

no reliable edge (random outcomes)

12/23/2025 1:51:56 PM	short term up	5 days later	-0.48%	-0.48%
12/3/2025 9:18:48 AM	short term cautious down	5 days later	+1.90%	-0.95%
12/1/2025 10:51:32 AM	short term cautious down	6 days later	+2.10%	-1.05%
10/28/2025 3:52:51 PM	medium term down	20 days later	+1.60%	-1.60%

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France's strategy of issuing short-term debt assumes the ECB keeps cutting. At a time when Isabel Schnabel talks about hikes, what's your view?

Lizzy Burden
Alexandra Ivanova

We are in a very good place with the ECB; inflation seems under control. My inclination is inflation will undershoot with euro strength and imported disinflation.

It helps countries like France and Germany fund themselves. Given the steep yield curve, it makes sense to focus on short-end funding as the cost isn't necessarily high.
Is this a moment to buy French sovereign debt (OATs) or steer clear due to political turmoil?

Lizzy Burden
Alexandra Ivanova

I haven't been buying OATs all year. It's easier to have better conviction in credits. Within French credits, maybe banks, some lower-rated hybrids.

Bonds tend to react to this news and give opportunity. From the sovereign side, I'd probably be neutral or underweight.
Sometimes wobbles in sovereign debt act as a buying opportunity for French corporate credit. Where do you see those opportunities next year?

Anna Edwards
Alexandra Ivanova

The fundamental picture for corporates is much better. Banks are very well capitalized. Some subordinated bank paper looks attractive given yields and coupons.

If the market says there needs to be an extra premium, that gives me an opportunity to step in.
You note uncertainty is lifting. Is that because you don't see a repeat of the April 2025 tariff drama? Does 2026 look smoother?

Anna Edwards
Alexandra Ivanova

If we knew in 2024 what would happen in 2025, we wouldn't assume risk markets would be where they are today. The peak of uncertainty and trade war spikes probably won't repeat in 2026.

Market reaction to headlines isn't always logical. Helps to be prepared, but I think the worst is past.
What if the Supreme Court strikes down Trump tariffs? Does that give you concern for Treasuries regarding how the President funds tax cuts?

Lizzy Burden
Alexandra Ivanova

I have been quite negative on Treasuries given they have outperformed this year. In 2026, risk scope for Treasuries is to slightly underperform and curve to steepen more than other government bond markets.

Treasury is issuing more bills; the Fed is attuned to liquidity pressures and will buy more T-bills. Next year we could see flaring up of risk premium on Fed independence or inflation coming back.
How does the jobs story fit? What if GDP runs hot but jobs run cold?

Anna Edwards
Alexandra Ivanova

That's quite risky. The Fed would be on hold or continue to cut if labor market is weak, but the economy is growing strongly. That's jobless growth, likely from productivity (AI).

This risks a more inflationary environment at the back end of 2026/2027, putting the dual mandate in tension with itself.
What happens to gilts next year if we see Starmer weakened at the May elections?

Lizzy Burden
Alexandra Ivanova

That is a major risk for gilts. We took profits on long gilt positions because we believe gilts might be volatile and will continue to be weaker, at least in the belly of the curve.

The long end might be supported by much less issuance. It's a barbell position for me.

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