Bond market outlook amid geopolitics and inflation (with Tom Mackenzie, Anna Edwards, Guy Johnson)

4/27/2026 5:34:32 PM	medium term cautious up	20 days later	+6.18%	+3.09%
3/27/2026 9:31:06 AM	medium term up	21 days later	-2.12%	-2.12%

Asks about the bond market reaction if inventories run dry by mid-July/August due to the Strait of Hormuz closure.

Tom Mackenzie

David Zahn

Even with a peace deal, it will take 3-9 months for oil markets to normalize. Inflation could be more sticky, especially in Europe and the UK, driving bond yields slightly higher.

Some of that is priced in, but overall inflation could be more sticky.

Asks if this will drive expectations of further central bank hikes.

Tom Mackenzie

David Zahn

Expects two ECB hikes (next week and September) and one BOE hike. The ECB needs to hike more aggressively to cap off inflationary pressures and secondary effects.

The UK is in a difficult spot with political risk, weak labor market, and high inflation. The BOE wanted to cut but now may have to hike.

Asks how political uncertainty in Europe (France, Italy, Spain elections) factors into bond market strategy, specifically OATs.

Anna Edwards

David Zahn

Is heavily underweight French OATs. Expects fiscal easing before elections, which will unnerve the bond market. French spreads over Germany (65-70 bps) are too tight and should be closer to 100 bps due to poor fiscal dynamics and political risk.

Three out of four biggest countries in Europe have elections next year. France is the big one.

Asks about his view on UK 30-year gilts at 6%.

Anna Edwards

David Zahn

6% on the 30-year gilt is a reasonable long-term level. The UK will continue to pay a political premium, making funding costs higher than fundamentals suggest.

If the BOE keeps inflation around 2-3%, a 3% real yield insulates against longer-term risks. The UK is the highest yielder among major developed markets.

Asks if we are in a world where yields step up, buyers appear, then another shock pushes yields higher again.

Guy Johnson

David Zahn

Yes, all bond markets are going up (Japan, US, UK). The UK is unique as the highest yielder. Expects other yields to compress up towards UK levels, but not all the way.

Asks why the UK has a long-term political premium.

Tom Mackenzie

David Zahn

It's both an inflation and political premium. The UK has a leadership election coming, and whoever wins will likely go further left, meaning more tax and spend. But the UK is already at post-WWII tax levels, limiting room without hitting growth.

The bond market will still have quite a bit of direction on policy. Burnham won't be able to spend as much.

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