Summary of U.S. Fixed Income Markets 2026 Outlook Industry Overview - **Industry**: U.S. Fixed Income Markets - **Company**: J.P. Morgan Securities LLC Key Economic Forecasts - **Real GDP Growth**: Projected at 1.8% for 2026, consistent with 2025 pace [5][19] - **Core PCE Inflation**: Expected to moderate slightly to 2.7% [19][28] - **Unemployment Rate**: Anticipated to remain stable at 4.3% [19][25] Interest Rate Expectations - **Federal Reserve Actions**: Anticipated 50 basis points (bp) cuts in January and April 2026 [5][19] - **Treasury Yields**: - 10-year yields expected to rise to 4.25% in Q2 2026 and 4.35% by Q4 2026 [6][19] - 2-year yields projected to remain around 3.51% through mid-year, rising to 3.85% by year-end [18][19] Fixed Income Market Dynamics - **Supply/Demand Imbalance**: Improvement expected in the Treasury market, but spread market technicals may worsen [19][41] - **High-Grade Corporate Spreads**: Forecasted to widen by 15bp to 110bp by year-end 2026 due to heavy supply and weakening credit fundamentals [19][44] - **High-Yield Bond Spreads**: Expected to widen by 30bp to 375bp, with default rates projected at 1.75% [15][19] Sector-Specific Insights - **Agency MBS**: Anticipated to provide modest excess returns despite a projected 5bp widening in OAS [19][28] - **ABS Market**: Expected to remain resilient with stable credit and slightly tighter spreads [11][12] - **CLOs**: Targeting new issue spreads to widen to 130bp, driven by waning exuberance and late-cycle defensiveness [15][46] Risks and Considerations - **Labor Market Risks**: Elevated risks of recession due to cyclical weakening in the labor market [29][30] - **Inflation Risks**: Core inflation expected to remain sticky, complicating the Fed's easing strategy [28][30] - **Regulatory Risks**: Potential impacts from financial deregulation and changes in capital frameworks [38][39] Technical Analysis - **Yield Curve**: Expected to remain range-bound with risks of flattening as the Fed goes on hold [6][19] - **Volatility**: Anticipated decline in shorter-expiry volatility, with longer-expiry volatility expected to increase [37][42] Conclusion - The outlook for the U.S. Fixed Income Markets in 2026 suggests a complex interplay of growth, inflation, and interest rate dynamics, with a focus on maintaining a defensive portfolio amidst macroeconomic uncertainties. The anticipated changes in yields and spreads across various sectors highlight the need for strategic positioning in the evolving market landscape.

Summary of Key Points from the Conference Call Industry Overview - The conference call focuses on the **Global Macro Strategy Outlook** for 2026, particularly regarding interest rates and currency trends across G10 economies. Core Insights and Arguments 1. **Interest Rate Trends**: - Lower G10 rates and a weaker US dollar are expected to persist into the first half of 2026, with a reversal anticipated around the US midterm elections in November 2026 [1][4][6] - US Treasury yields are forecasted to end 2026 at **4.05%**, after reaching **3.75%** by June [3][6] - The yield curve is expected to steepen further, particularly in the euro area where the ECB is projected to cut rates to **1.50%** [3][6][18] 2. **Currency Outlook**: - The DXY is expected to decline by **5%** to **94** in the first half of 2026 before rebounding in the second half [6][41] - Risk currencies like AUD and SEK are anticipated to lead gains, while USD/JPY is projected to fall to **140** due to declining US rates [6][41][47] 3. **Inflation-Linked Bonds**: - TIPS breakevens in the US are expected to tighten into mid-2026, with a widening anticipated by the end of the year as economic conditions improve [8] 4. **Sovereign Supply Outlook**: - Net coupon bond supply across the G7 is expected to decrease by **14%** year-over-year, amounting to **$2.45 trillion** in 2026 [26][34] - The decrease in net issuance is anticipated across the US, euro area, Japan, and New Zealand [34] 5. **Regional Specifics**: - **United States**: The Fed is expected to cut rates to **3.125%** in 1Q26, with 10-year Treasury yields projected to reach **3.75%** in 1H26 [52][76] - **Euro Area**: The ECB's depo rate is expected to fall to **1.50%**, with 10-year Bund yields projected to decline to **2.30%** by 2Q26 [58] - **United Kingdom**: The Bank Rate is expected to reach **2.75%** in 2026, with 10-year gilt yields around **3.9%** [64] - **Japan**: JGB yields are expected to rise to **1.65%** for 10-year bonds by 4Q26 [71] Other Important Insights 1. **Market Dynamics**: - The interplay between US and global rates will shape both rates and FX performance in 2026, with a focus on duration and curve trades over credit beta [25][40] - The anticipated fiscal policy changes could significantly impact investor expectations regarding sovereign supply [39] 2. **Investment Strategies**: - Preferred trades include long 5-year Treasuries and yield curve steepeners via options [57] - In the euro area, long positions in EU vs Germany in the 5-year sector are recommended as a carry play [62] 3. **Risk Factors**: - A potential mild US recession could lead to a significant drop in the funds rate, impacting Treasury yields [16][80] - The risk of a global risk-off episode could widen spreads beyond current expectations [21] This summary encapsulates the key points discussed in the conference call, providing a comprehensive overview of the anticipated trends in interest rates, currency movements, and investment strategies for 2026.

Summary of Key Points from the Conference Call Industry Overview - The discussion revolves around the **Interest Rate Derivatives** market, particularly focusing on the impact of tariffs and macroeconomic uncertainties on market dynamics [2][3][4]. Core Insights and Arguments - **Tariff Uncertainty**: The market is experiencing a "superposition" of states regarding tariffs, leading to significant policy uncertainty. This has resulted in declines in equity markets and increased volatility [3][4]. - **Market Performance**: The S&P 500 index has dropped to its year-to-date low of 5739 points, with the trade-weighted dollar at 113.3 and crude oil prices at $66.4 per barrel. High yield spreads have widened to 337 basis points [5]. - **Yield Forecasts**: UST strategists have revised yield forecasts lower, particularly at the front end, while expecting sustained upward pressure on term premium due to global phenomena such as deficit-funded defense spending in Europe [6]. - **Volatility Trends**: There is a notable increase in intraday volatility, reaching six-month highs, attributed to rising geopolitical risks and macroeconomic uncertainties [28][32]. Trading Recommendations - **Long Term Premium Exposure**: The recommendation includes underweighting the belly of a 1Y forward 3s/7s/30s equal-weighted swap butterfly to gain exposure to rising term premium [14][62]. - **Swap Curve Flatteners**: Initiating 9Mx3M / 15Mx3M swap curve flatteners paired with 2Yx2Y / 3Mx10Y swap curve flatteners is suggested, as yields are expected to remain range-bound [15][63]. - **Volatility Positions**: A bullish stance on long volatility positions in longer expiries is recommended, while maintaining a cautious approach towards short expiry volatility due to rich valuations [36][37]. Additional Important Insights - **Market Depth**: There has been a significant decline in market depth, which is expected to persist as macroeconomic risks remain elevated [26][28]. - **Swap Spreads**: Swap spreads have been relatively quiet, with modest narrowing observed. The focus remains on maintaining exposure to narrower spreads in the belly and a flatter swap spread curve [45][50]. - **Implied Volatility**: Implied volatility has increased modestly across various structures, with a recommendation to buy 1Y forward 1Yx2Y volatility versus 1Y forward 1Yx10Y volatility due to recent cheapening [22][37]. Conclusion - The current market environment is characterized by heightened uncertainty due to tariff policies and macroeconomic factors, leading to strategic recommendations focused on volatility and term premium exposure. The emphasis is on navigating the complexities of the interest rate derivatives market while capitalizing on relative value opportunities.