What course will the Federal Reserve take on further interest rate cuts in 2026?
Jason Daw: There's a lot of uncertainty surrounding the Fed next year. Hawks and doves on the Federal Open Market Committee have never sounded more divided than they are right now, and the lack of timely macroeconomic data certainly hasn't made resolving those differences any easier.
Blake Gwinn: Each additional cut from here is going to be increasingly hard fought. You're going to see the hawks getting louder and louder. With the current divide, they really only have to swing one or two of the centrists to capture a majority.
The impact of Trump’s appointment of a new Chair has perhaps been overdone. Powell is already on the dove side of the committee, so replacing him with another dove is not really going to swing the scales.
All told, we have only two more cuts from here. That's the terminal rate, stopping in the 3.25 to 3.5% range – definitely short of the 3% that's currently priced in the market. After that, I have them on hold for the rest of the year.
“Each additional cut from here is going to be increasingly hard fought – you’re going to see the hawks getting louder and louder.”
Blake Gwinn, Head of U.S. Rates Strategy
What does that mean for Treasury yields and curves?
Gwinn: If we do see the Fed stopping short as we expect, I think it's enough to shift us back into the kind of yield ranges that we saw before the negative non-farm payroll revisions in mid-2025.
2026 is likely to be a fairly range-bound environment for Treasuries. It’s going to be more about tactical trading than putting on large directional positions on either duration or curve.
I don't think we're expecting a meaningful rise in term premium this year, but I could potentially see some temporary upward yield shocks. There could be tariff revenue reversals or even a resurgence of de-dollarization concerns, but I don’t have a fundamentally bearish view around these things.
What’s the growth outlook for Canada and what does that mean for rates?
Simon Deeley: The general trend has been pretty weak productivity and investment numbers relative to the U.S.
We see growth in the 1.5% to 2.2% annualized range in each quarter of 2026. This should reduce economic slack, and even eliminate it, over the course of the year. Heavy government investment should add about 0.3% to growth as a whole in 2026.
In October, the Bank of Canada did introduce a conditional pause to the overnight rate at 2.25%, which solidified our view that they will keep it there through the end of 2026.
What are the prospects for Canadian bonds?
Deeley: In terms of yield, some expected pricing of hikes in late 2026 should see some flattening of the curve. Government of Canada bonds are typically impacted pretty heavily by moves in the U.S. Treasury market, so that will be worth watching as well.
Overall, we do think the Government of Canada can outperform Treasuries as U.S. cuts are priced out, especially in the belly of the curve, so around the five-year sector.
“We think the Government of Canada can outperform Treasuries as U.S. cuts are priced out, especially in the belly of the curve, so around the five-year sector.”
Simon Deeley, Canada Rates Strategist
What are the factors affecting European and U.K. central bank decisions?
Peter Schaffrik: Unemployment is still relatively low, wage growth is still slightly elevated, and inflation is at the ECB’s target. The market is still expecting residual rate cuts going into 2026, but I have difficulty seeing that happen.
The U.K. is a different animal. Inflation is going to come down. Growth is going to be weak-ish, and even if the labor market starts to recover, it will take some time. In that environment, we think that the Bank of England, one of the last central banks that's running restrictive policy, can ease policy quite a bit.
What direction will European bond yields go?
Schaffrik: We have a fairly negative view for bond yields. On top of the lack of stimulus for yields to come down from the short end of the curve, I would argue that the steepening that we've seen in the Euro curve probably has still further to run.
In relative terms, however, we like the U.K. If you want to build a portfolio where you take some long duration, we really recommend to take it in the UK, relative to the euro area, and in the front end of the of the sterling curve we even think some absolute gains can be achieved.
“If you want to build a portfolio where you take some long duration, we really recommend to take it in the UK.”
Peter Schaffrik, Chief European Macro Strategist
What’s the rate outlook for Australia in 2026?
Robert Thompson: Earlier in the year, Australia’s inflation looked to be fading, with the central bank’s 2.5% midpoint target coming into sight. Instead, inflation is back to 3%-plus. The supply side of the economy simply isn’t able to keep up with the pick-up on the demand side.
Our base case is that the bank leaves rates unchanged through 2026. The cash rate is already on the restrictive side at 3.6%, and the bank has recently preferred a smooth, patient approach to the rate cycle, tolerating some high short-term inflation to protect the labor market.
But we’d put the odds of at least one hike at around the 25% mark. If inflation doesn’t slow materially over the next three to six months, the resumption of the hiking cycle will likely become the base case.
“Australia’s inflation looked to be fading, but is back to 3%-plus – the supply side of the economy simply isn’t able to keep up with the pick-up on the demand side.”
Robert Thompson, Macro Rates Strategist
What can investors expect from Australian bond performance?
Thompson: It’s been a rough ride for investors in Aussie bonds lately. The benchmark 10-year spread over Treasuries has jumped from -20 basis points in June to +50 now. We think there's more than enough value in there already for investors. The main issue is that there's no imminent catalyst from the Aussie side on the calendar to allow this kind of trade to perform. So, against the U.S. relative performance may depend more on our view that U.S. rates should sell off given the Fed is priced for too much.
We also tend towards the view that the curve can resume flattening through 2026. There’s likely to be more movement in the Fed story next year than the RBA story, so marginal flattening will be driven by the Aussie correlation with the Treasury curve, punctuated with occasional domestic-led movements.
