After Hormuz reopens, rates pullback can be participated in conditionally, but tail-risk hedges should still be retained

Overview

This report is JPMorgan's global fixed income markets weekly report, focusing on trading views across developed-market rates, European rates, Scandinavia, US Treasuries, interest rate derivatives, Japan, and Australia/New Zealand after the reopening of the Strait of Hormuz, US-Iran negotiations, and the pullback in energy prices. The main message is that market risk sentiment has improved, but the rates market is still pricing the easing of the conflict more slowly than energy and other markets, indicating that investors are still pricing for a prolonged conflict or sticky-resolution scenario.

Core views

The core views include: first, front-end developed-market yields have broadly rebounded, but the magnitude of the DM rates pullback has lagged the energy market, and there is still uncertainty over the conflict path. Second, the European market is not suitable for directly increasing duration or intra-EMU spread risk; it is recommended to continue holding hedges against renewed escalation risk and to express bullish EUR front-end rate views through options structures. Third, the ECB hiking path has been pushed back to June and September, with risks tilted more dovishly. Fourth, the US rates market is priced more dovishly than JPMorgan's forecasts, 10-year valuations look rich, and while the bank leans bearish it remains neutral for now. Fifth, the 5Yx5Y model shows that GBP medium-term yields look cheap relative to macro drivers, while USD and EUR medium-term swap rates are broadly fair.

Analysis framework

The report combines market scenario analysis, OIS forward pricing, energy-price retracements, yield-curve changes, macro forecast revision indices, rates signal scorecards, relative-value trades, and options structure recommendations to assess whether ceasefire optimism is sufficient to support a further pullback in the rates market. Trade expressions emphasize conditionality, low beta, and hedging rather than unprotected one-way duration bets.

Methodology notes

• Scenario analysisMiddle East conflict scenarios

  Compare current EUR and GBP rate levels under scenarios such as Sticky Resolution, Prolonged Conflict, and Severe Shock.

  The report uses the projected positions of 1Y OIS, 1Yx1Y OIS, and 10-year bond yields under different conflict scenarios to judge that the market is still pricing between prolonged conflict and sticky resolution.

• Valuation model5Yx5Y macro valuation model

  Regress the 5Yx5Y OIS forward against JPMorgan's growth and inflation forecast revision indices.

  This model is used to judge whether medium-term swap yields are rich or cheap relative to macro drivers; the results show GBP medium-term yields look cheap, while USD and EUR are broadly fair.

• Signal scorecardRates signal scorecard

  Aggregate 10-year yield and 2s/10s curve signals on a -5 to +5 scale.

  The scorecard combines central bank policy forecast deviations, fair value models, client surveys, active bond fund positioning, and momentum models, but absolute strength is not directly comparable across markets and indicators.

Asset mapping & comparison

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

• EUR front-end rates

  Ceasefire and dovish ECB comments support bullish expressions

  Strengths

  ECB April hike expectations have fallen sharply, lower energy prices reduce urgency, and options structures can limit downside risk.

  Weaknesses

  The market is still pricing about 45bp of cumulative hikes; if second-round inflation effects intensify, rates may rise again.

  Comparison

  Relative to directly buying European duration, receiver flies and conditional bull steepeners are more suitable in an uncertain environment.

  Risks

  Renewed escalation of the Middle East conflict, a rebound in energy prices, and more hawkish ECB communication.

• European yields and intra-EMU spreads

  Remain cautious and retain hedges

  Strengths

  If a peace agreement proves more durable, there is still room for further pullback.

  Weaknesses

  The report believes that even under an optimistic scenario, it is unlikely to return quickly and fully to pre-war levels.

  Comparison

  Relative to unprotected duration or spread trades, tail-risk hedges are preferable.

  Risks

  Conflict escalation, fiscal supply pressure, and wider peripheral spreads.

• US Treasuries

  Valuations look rich; lean bearish but remain neutral for now

  Strengths

  Growth concerns and uncertainty over Fed leadership may continue to suppress yields.

  Weaknesses

  Market pricing is more dovish than JPMorgan's forecasts, and the 10-year fair value model shows yields are too low.

  Comparison

  Relative to the European front end, the report is more restrained on US directional trades.

  Risks

  Fed chair selection, balance sheet policy, and renewed tightening in the labor market.

• GBP 5Yx5Y OIS

  Screened by the model as cheap relative to macro drivers

  Strengths

  The long-term macro valuation model shows GBP medium-term yields are low relative to growth and inflation forecast revision indices.

  Weaknesses

  UK growth forecasts have been revised down, and macro uncertainty remains high.

  Comparison

  USD and EUR medium-term swap rates are broadly fair in the model, while GBP appears relatively cheaper.

  Risks

  Repricing of the BoE path, further weakening in UK growth, and sticky inflation.

• Japan JGBs

  Short- to medium-end JGBs remain attractive

  Strengths

  April hike expectations have faded, but the market still prices further hikes, leaving relative value in the short to medium end.

  Weaknesses

  If the BoJ path turns hawkish again, the short to medium end may come under pressure.

  Comparison

  The report treats Japan as a supplementary regional view, with less emphasis than Europe and the US.

  Risks

  BoJ policy adjustments and inflation and wage data surprising to the upside.

• Australia and New Zealand rates

  Maintain relative-value curve and OIS spread trades

  Strengths

  The report recommends holding an AUD 1s/3s IRS flattener and paying the Jun-26 RBA/Jul-26 RBNZ OIS spread.

  Weaknesses

  Relative-value trades depend on whether central bank path divergence is realized.

  Comparison

  This is more an extension of regional strategy rather than the report's main theme.

  Risks

  Rapid reassessment of RBA or RBNZ policy expectations.

Key data

• Weekly change in DM yield curves4-8bp steepeningOver the past week, developed-market curves generally bear-steepened, with the front-end rebound continuing.
• Energy price retracementOil about 60%, natural gas about 70-75%Relative to post-conflict peaks, the retracement in energy prices has been significantly larger than in the rates market.
• Rates market retracementFront-end OIS and 10-year bonds about 40-50%10-year Bunds and Gilts are stickier, retracing only about 30%.
• ECB market pricingAbout 2bp of hikes in April, about 45bp cumulative hikes by end-2026The report believes the current pricing of 45bp cumulative hikes is slightly hawkish.
• JPMorgan ECB forecastHikes delayed to June and September 2026The previous expectations for hikes in April and July have been pushed back, with risks tilted more dovishly.
• BoE market pricingAbout 3bp of hikes in April, about 30bp cumulative hikes by end-2026BoE OIS pricing also lowered near-term hike expectations this week.
• Fed market pricingAbout 14-16bp of cuts by end-2026, about 37bp cumulative cuts by end-2027The report believes the market is more dovish than JPMorgan's forecasts, but does not yet recommend an immediate contrarian trade.
• IMF global growth forecast3.1% in 2026, 3.2% in 2027The IMF lowered its 2026 global growth forecast by 0.2 percentage points and did not revise down 2027.
• UK 2026 growth forecast revisionCut from 1.3% to 0.8%In the IMF forecasts, the UK was one of the main economies revised down.
• Germany 2026 growth forecast revisionCut from 1.1% to 0.8%Germany also saw a notable downgrade.

Impact & implications

For portfolios, the implication is that the reopening of Hormuz and ceasefire talks have reduced the most extreme energy-shock risks, but the rates market still needs to pay insurance costs against renewed conflict escalation, second-round inflation effects, and central bank communication risks. The report prefers using options structures to participate in a rebound in EUR front-end rates, rather than directly increasing European duration or intra-EMU spread exposure. For the US, rich valuations and dovish market pricing limit the attractiveness of directional duration; for GBP medium-term yields, the model indicates a relative-value opportunity.

Risks

• A breakdown in US-Iran negotiations or renewed escalation in the Middle East conflict, leading to a rebound in energy prices and the return of safe-haven pricing to the market.
• The energy shock could create second-round effects through inflation expectations, core prices, or wages, making it harder for the ECB, BoE, or other central banks to look through the shock.
• Market optimism about a peace agreement may be excessive; if conditions reverse, direct duration and intra-EMU spread exposure could suffer.
• Uncertainty around Fed leadership and balance sheet policy could change pricing in the US long end and the curve.
• Current OIS and bond yields deviate from macro models or policy expectations; if positioning is crowded, drawdowns could be amplified.

What to watch

• Progress in US-Iran negotiations, the shipping status of the Strait of Hormuz, and whether the ceasefire is sustainable.
• The extent of retracement in Brent, TTF gas, and UK natural gas prices relative to pre-conflict levels and peak levels.
• ECB official commentary and inflation and wage data ahead of the June and September meetings.
• Repricing in the OIS curve for the ECB, BoE, and Fed policy paths in 2026-2027.
• Whether the US labor market continues to tighten, as well as Fed chair confirmation hearings and balance sheet policy communication.
• Whether fair value, positioning, and momentum signals in the 10-year US, German, and UK rates signal scorecards move into alignment.