The Good The Bad And The Ugly For Rates In 2027

(MENAFN- ING) Key calls and themes and 2027

US rates and a triple whammy of obstacles to overcome

In the US, our baseline view centres on the good, the bad and the ugly causing trouble in the coming months, and right through the first quarter of 2027 at least, to prompt a return of the 10yr US Treasury yield to the 5.25%-plus area (vs 4.9% currently). We'd cap the absolute upside at 5.5%, as waiting later in 2027 is a 2%-plus handle for GDP growth and inflation, alongside a stable but not worsening debt dynamic narrative. The fall in inflation here is key, as that allows the Federal Reserve to step away and for the market to re-discount cuts. That allows long-dated yields to edge back down, with the 10yr targeting 4.75% for starters and likely settling in the 4.5-4.75% zone, which is still above normal, but rightfully so. We don't call for it, but a decision to materially cut long-end Treasury funding would push in the same direction.

Euro rates have good reason to be nervous

For euro rates, we also expect a bumpy ride at the start of 2027, whereby markets anxiously weigh each inflation reading for signs of second-round effects. If all goes well, we should see a significant repricing of the European Central Bank path, helping the 2yr EUR swap rate down by some 50bp. The 10yr rate will be stickier, however, as a global rise in real rates adds upward pressure to longer euro rates. If inflation does not ease as hoped, then we could see a stretch higher in rates from here. In such a scenario, the 10yr swap rate could push well above 4%.

European bond spreads in a duel with the "bad"

Fiscal strains and election risk are putting eurozone bonds to the test. France is the key fault line, while Bunds' safe-haven appeal masks mounting supply pressures. We see a turbulent first half of 2027, and any relief hinges on a credible path to French fiscal consolidation

A delayed landing for GBP rates

Sterling rates are well above levels we consider fair value, but trauma from turning too dovish too quickly is still on investors' minds. Only once the Bank of England can prove its ability to bring inflation closer to target (by the end of 2027) do we pencil in a significant repricing lower for GBP rates. Relatively high sensitivity to US rates means we don't expect the path lower to be a smooth one. And with gilt markets increasingly reliant on risk-sensitive investors, we think a material term risk premium remains justified.

The grand Dutch pension reforms finale

Dutch pension reforms are reaching their finale as almost €900bn of assets are scheduled to transition in January 2027. The reforms should keep the 10s30s euro swap curve structurally steeper, but macro will continue to be the main driver of the curve for now. Under the new system, we expect more swap flows throughout the year as the need for interest rate hedges moves in tandem with asset prices (i.e. equities).

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