JPMorgan: Maintain 'long risk beta, long USD' in 2H 2026; US Treasury yields biased higher in the medium term

Overview

This is a J.P. Morgan global macro strategy report covering US rates, international rates, foreign exchange, commodities, and emerging markets. The main message is that global growth may recover, but inflation remains somewhat sticky, US exceptionalism persists, and the Fed stays on hold in 2026 while the risk of future hikes rises. Accordingly, the report leans toward higher US Treasury yields in the medium term, a stronger dollar in 2H 2026, continued effectiveness of carry strategies, and opportunities in high-yielding and relatively stable-fundamental emerging-market currencies.

Core views

On US rates, the report expects the Fed to maintain a 3.5%-3.75% target range throughout 2026, with a possible hike only in Q3 2027; 2-year and 10-year US Treasury yields are expected to reach 4.20% and 4.70%, respectively, by end-2026. On international rates, European yields are expected to trade range-bound, with the summer market backdrop supporting some carry trades, though intra-eurozone spread carry is insufficient to fully withstand a deterioration in risk sentiment. In FX, the report maintains a 'long risk beta, long USD' view, lowers its EUR/USD forward target to 1.10, and forecasts USD/JPY at 164 in Q4 2026. In commodities, the structure of the oil shock differs from expectations; Brent remains elevated but its 2027 average declines; the gas market is tight, copper is affected by potential US tariff policy, and gold performance is relatively weak. In emerging markets, the report upgrades EM FX to overweight, while EM rates, sovereign credit, and corporate credit remain neutral.

Analysis framework

The report combines macro forecasting, rates fair-value regression, cross-market relative value, fiscal financing supply-demand estimates, FX cycle comparison, political risk scenario analysis, and commodity supply-demand judgment. Its focus is not single-asset pricing, but rather mapping US growth, inflation, the Fed path, fiscal financing, energy prices, geopolitics, and emerging-market central bank reaction functions jointly into rates, FX, commodities, and credit positioning.

Methodology notes

• Rates Valuation10-year Treasury fair-value model

  10-year US Treasury fair-value regression

  The report regresses the 10-year US Treasury yield on 1y1y OIS, 5y5y seasonally adjusted TIPS breakeven inflation, J.P. Morgan US forecast revision indices, the Fed balance sheet as a share of the US economy, and trade policy uncertainty variables; the regression R-squared over the past five years is 97.9%, and it is used to judge that the current 10-year US Treasury yield is 27bp below model fair value.

• Curve Strategy10s/30s Treasury curve fair-value model

  10s/30s US Treasury curve fair-value model

  The report uses 1y1y OIS, 5y5y seasonally adjusted TIPS breakeven inflation, the Fed balance sheet share, and trade policy uncertainty dummy variables to explain the 10s/30s curve, with a five-year R-squared of 87.0%; the conclusion is to use 10s/30s flatteners as a low-beta way to express medium-term upside risk in yields.

• Cross-Market Relative ValueUST versus Bund regression

  US Treasury versus German Bund spread regression

  The report compares the deviation of the 10-year US-German yield spread relative to the USD/EUR OIS spread and forecast revision indicators, concluding that US belly rates underprice tightening risk and therefore continues to recommend being short 10-year USTs versus Bunds.

• FX Cycle AnalysisFed hiking cycle USD playbook

  USD path during a Fed hiking cycle

  The report compares USD performance from about six months before the Fed's first hike to about one month after, arguing that the dollar typically appreciates by around 5% during that phase; in the base case, broad USD is expected to rise about 3%.

• Scenario AnalysisOil and Fed scenario roadmap

  Oil-price and Fed policy combination scenarios

  The report uses combinations of oil-price normalization or renewed escalation and Fed easing or hiking to assess the relative performance of USD, carry, high-yielding currencies, energy exporters, and energy importers, and to formulate FX risk scenarios.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• 10-year US Treasury

  The report recommends being short 10-year USTs versus German Bunds and sees greater medium-term upside risk to yields.

  Strengths

  US economic resilience and sticky inflation provide upward drivers for nominal yields.

  Weaknesses

  Quarter-end rebalancing and temporary fixed-income inflows could bring short-term yield declines.

  Comparison

  Relative to German Bunds, US belly rates are more underpricing tightening risk.

  Risks

  If growth weakens rapidly or safe-haven demand rises, the short-duration strategy may come under pressure.

• US Dollar

  The report maintains a bullish USD view, arguing that US exceptionalism and a potential Fed hiking cycle provide support.

  Strengths

  US yield advantage, equity-market performance, growth resilience, and a hawkish Fed all support the dollar.

  Weaknesses

  Fiscal and FX policies may create downside risk for the dollar.

  Comparison

  Relative to currencies such as EUR, JPY, CAD, and SEK, the dollar has greater upside elasticity in the report's framework.

  Risks

  If energy prices normalize and the Fed turns dovish, both the dollar and carry may come under pressure simultaneously.

• EUR/USD

  The report lowers its EUR/USD forward target to 1.10 and maintains a bearish euro view.

  Strengths

  ECB hikes ahead of the Fed provide some protection for the euro.

  Weaknesses

  The euro remains a low-yield global currency and is constrained by energy dependence.

  Comparison

  In past Fed hiking cycles, EUR/USD has typically weakened after rate differentials compressed.

  Risks

  If European growth improves significantly or US policy risk depresses the dollar, the euro may fall less than expected.

• Japanese Yen

  The report remains bearish on JPY and forecasts USD/JPY at 164 in Q4 2026.

  Strengths

  Japanese policy events may bring temporary volatility and safe-haven support.

  Weaknesses

  The global monetary policy cycle, Japan's domestic policy mix, improved risk sentiment, and the return of carry are all unfavorable for JPY.

  Comparison

  Relative to high-yielding currencies and dollar assets, JPY is weaker in a carry environment.

  Risks

  If global risk events escalate or Japanese policy turns more hawkish, JPY may rebound.

• Brent Crude Oil

  The report expects oil prices to remain relatively high in 2H 2026, but the 2027 average to decline.

  Strengths

  Supply and inventory factors still support oil prices in the short term.

  Weaknesses

  Demand loss and inventory changes indicate the market has already rebalanced through a different path.

  Comparison

  The oil-price path directly affects CAD, NOK, currencies of energy importers, and high-yielding EM currencies.

  Risks

  A breakdown in a US-Iran deal or renewed escalation in the Middle East could push Brent toward the high-oil-price scenario.

• Emerging Market FX

  The report upgrades EM FX from neutral to overweight.

  Strengths

  High yields, lower fundamental vulnerability, and proactive hikes by some central banks support the continuation of carry.

  Weaknesses

  A hawkish Fed, rising inflation, and oil-price volatility could challenge the asset class.

  Comparison

  Relative to EM rates, sovereign credit, and corporate credit, EM FX receives a more constructive allocation recommendation in the report.

  Risks

  A growth shock, rapid dollar strengthening, or another oil price spike would weigh on EM FX performance.

Key data

• US GDP Forecast2026 q4/q4 growth of 1.9%The report also forecasts core PCE at 3.4% q4/q4 in 2026, with the unemployment rate falling to 4.1% in Q4 2026.
• Fed Policy PathMaintain 3.5%-3.75% throughout 2026The report expects the Fed to remain on hold in 2026 and possibly hike in Q3 2027 due to a tightening labor market and inflation above target.
• US Treasury Yield Forecast2-year 4.20%, 10-year 4.70% (end-2026)By Q2 2027, the forecast for 2-year and 10-year US Treasury yields is 4.30% and 4.75%, respectively.
• 10-year US Treasury Valuation Gap27bp below model fair valueThe report believes belly Treasuries underprice the risk that the market will price in further tightening over the next year.
• US Fiscal Deficit ForecastFY26 at $2.020 trillion, FY27 at $1.960 trillionThe forecast incorporates faster IEEPA tariff refunds and a slower accumulation of tariff revenue.
• US Treasury Supply-Demand GapOther investors need to absorb an additional $543 billion of supply in 2026The report believes the shift in Treasury holders toward price-sensitive investors will keep medium- to long-term yields at higher levels.
• USD ViewBroad USD base-case upside of about 3%Historically, broad USD typically appreciates by about 5% around the start of Fed hiking cycles.
• Major FX ForecastsEUR/USD target 1.10; USD/JPY 164 in Q4 2026; USD/CNY 6.70 in Q4 2026The report believes US exceptionalism, rate differentials, and the carry environment support the dollar, while the euro and yen face pressure.
• Brent Oil Forecast$86 in Q3 2026, $80 in Q4, $78 by end-2026, 2027 average of $64The report believes the oil shock has rebalanced through a combination of demand loss and inventory decline different from the initial assumption.
• Emerging Market AllocationEM FX upgraded from neutral to overweight; EM rates, sovereign credit, and corporate credit remain neutralFavors high-yielding currencies, currencies where central banks are prepared to hike, and frontier-market FX.

Impact & implications

If the report's base case materializes, portfolios need to guard against the impact of renewed upward moves in medium- to long-term US Treasury yields and dollar strength on duration, foreign-currency assets, and commodity-linked currencies; at the same time, carry remains an important source of returns in the second half, especially in high-yielding EM FX. On the commodities side, a pullback in elevated oil prices but continued tightness in natural gas and rising policy risk for copper will affect the relative performance of energy importers, energy exporters, and metal-linked currencies. On credit, EM credit spreads may remain tight, but a growth shock would be the main downside risk.

Risks

• Continued US labor-market strength could lead markets to price in more Fed tightening, pushing medium- to long-term yields higher.
• Stickier-than-expected core inflation would undermine bond longs and low-yielding currencies.
• Changes in US fiscal policy, tariff refunds, and issuance timing could raise term premium and supply pressure.
• Weak demand for US Treasuries from foreign investors and commercial banks could shift more supply toward price-sensitive investors.
• Political events such as US midterm elections, USMCA, a Trump-Xi summit, and a US-Iran deal could alter the path of the dollar, oil prices, and risk sentiment.
• Another spike in oil prices into a high-volatility scenario would hit energy importers, EM FX, and risk assets.
• EM credit spreads may remain tight, but if a growth shock occurs, spreads face the risk of widening again.

What to watch

• Whether US nonfarm payrolls, unemployment, and wage data continue to show labor-market tightening.
• Whether core PCE and inflation expectations support the Fed hiking again in 2027.
• Whether the US Treasury adjusts its guidance in August to 'maintain coupon auction sizes unchanged.'
• The actual absorption capacity of foreign investors, commercial banks, bond funds, and pension/insurance capital for US Treasuries.
• Whether the deviation of the 10-year US Treasury yield from model fair value converges.
• Whether the dollar index, EUR/USD, USD/JPY, and USD/CNY follow the report's forecast path.
• Whether Brent moves toward the $60 normalization scenario or the $110 re-escalation scenario.
• Progress on US midterm elections, USMCA negotiations, Section 122 tariffs, a final US-Iran agreement, and the Trump-Xi summit.
• Whether EM central banks continue proactive rate hikes and support carry in high-yielding currencies.