J.P. Morgan: How does JPMorgan view US, European and Japanese rates after the global bond rally?

Why have global rates fallen from their highs?

Intermediate rates in developed markets have generally fallen after reaching multiyear highs in early October, partially reversing their rise since the end of June. JPMorgan believes there is currently limited evidence that the energy shock has passed through to core inflation and wages, and rate-hike expectations have cooled accordingly. Meanwhile, tighter financing conditions resulting from higher yields and wider spreads have deepened growth concerns.
The rally has also reduced the scope for attractive valuations. According to the bank’s long-term model adjusted for growth and inflation expectations, intermediate US dollar and sterling rates are only about 2 basis points above model fair value, while the euro 5-year rate starting in 5 years is at fair value.

The Federal Reserve kept its policy rate at 3.75%–4.00%. Its statement retained a tightening bias, but Chair Warsh did not reinforce that signal at the press conference and said tighter financing conditions could help restrain demand. Markets initially sold off on the hawkish statement, then reversed course: short-end Treasury yields fell about 10 basis points during the week, and the curve steepened.
Warsh also said there would be one meeting in 2027 and two in 2028 without a rate vote or policy statement. JPMorgan believes fewer opportunities for policy adjustments and communication could raise the long-term term premium; it still expects a 25-basis-point rate hike in December.
The bank maintains its position for a wider spread between 10-year and 30-year Treasury yields, but employment data stronger than it expects could push short-end rates higher and flatten the curve. Any adjustment by the Treasury to long-term debt issuance would also change the trading environment.

The European Central Bank kept rates unchanged while retaining a clear tightening bias. JPMorgan expects 25-basis-point hikes in both December 2026 and March 2027; however, higher energy prices could push up inflation and depress growth, while tighter financing conditions will also limit near-term upside for the terminal rate.
The bank believes the ECB neutral rate implied by money markets, above 3%, is too high. It therefore considers intermediate German government bond yields still attractive to long-term investors able to withstand short-term volatility and maintains a strategic overweight relative to US Treasuries. In the short term, it remains cautious about directly adding interest-rate exposure because the evolution of technology-share weakness and the situation in the Middle East remains unclear.
Although the spread between French and German 10-year government bonds narrowed during the week, the bank’s sovereign risk model still puts it about 50 basis points wider than fair value. JPMorgan believes sustained narrowing requires an improved fiscal and political outlook, a broad decline in European rates, or stronger ECB support, as well as a return of demand from domestic and other investors.

Japan’s 10-year government bond yield was about 2.8%, 30 basis points below its level of around 3.1% in early October. Demand at recent government bond auctions has been solid, and selling pressure from life insurers’ older low-coupon bonds is easing. JPMorgan therefore believes upward pressure on long-term yields will be restrained and retains its long position in 5-year Japanese government bonds.
Life insurers bought 7 trillion yen of super-long Japanese government bonds cumulatively this fiscal year through September, up from 5.6 trillion yen in the same period a year earlier; cumulative sales over the same period were 5.1 trillion yen, close to the year-earlier level. The bank estimates holdings of older low-coupon bonds have halved from their peak, reducing the amount available for further sale, but the Bank of Japan’s continued balance-sheet reduction could still increase supply pressure on 10-year government bonds over the medium term.
The Bank of Japan kept its policy rate at 1.25%. JPMorgan expects the next hike in December, followed by further hikes in April 2027, July and December; the Middle East situation, AI-related demand and exchange rates will affect the pace of increases.

The Reserve Bank of New Zealand voted 4 to 3 to keep the cash rate at 2.75%, contrary to earlier expectations from JPMorgan and the market for a 25-basis-point hike. The statement retains a tightening bias, but further hikes depend on economic data; the bank expects hikes of 25 basis points each in December and February of the following year, ending at 3.25%.
After Australian third-quarter inflation exceeded expectations, JPMorgan expects the Reserve Bank of Australia to raise its rate to 4.85% in November, which it sees as the final hike of this cycle. The bank also expects the RBA’s forecasts to show lower growth and higher unemployment, reflecting the economic cost of bringing down inflation.