By Laura Cooper, managing director, head of macro credit and global investment strategist, Nuveen.
It’s been difficult to chase duration across global rates. Just as one market starts to look attractive, long-end yields rise due to political or fiscal factors, correlations shift, and the opportunity slips away.
That dynamic has been front of mind this week. Rising UK political uncertainty, Japan’s pro-growth election outcome, and China symbolically advocating for trimming US holdings all reflect the same underlying challenge: duration hasn’t disappeared, but the conditions under which it works have narrowed as long-end rates remain under persistent pressure.
Japan: idiosyncratic – and increasingly so
Japan’s decisive election outcome brought the Takaichi trade back into focus. As equities rallied, JGBs sold off – led by the belly and long-end – reflecting the LDP’s pro-growth agenda and the potential for further monetary normalization.
From a fixed income perspective, and with yields at multi-decade highs, the key issue is how “responsible proactive fiscal policy” is implemented. Signals that additional consumption tax cuts will not be funded by increased market issuance help limit near-term supply risk. However, the neutral rate remains a key variable to watch and is likely to drift higher over time.
Importantly for bond investors, Japan’s fundamental picture has improved. The primary deficit has consolidated, net debt-to-GDP is declining, and debt-servicing costs remain exceptionally low – around 2% of revenue, compared with double-digit levels in the US. Japan’s large stock of US Treasury holdings continues to generate meaningful coupon income, quietly improving the fiscal picture at the margin.
Japan is therefore not a buy-and-hold duration story. It remains a curve and structure trade. Targeted long-end exposure via 10s/30s flatteners looks more compelling, reflecting elevated term premium already embedded in the 30yr sector.
China and the reality check
China remains a duration avoid. Yields do not compensate for structural challenges, access frictions, or persistent uncertainty around growth and overcapacity. In this market, carry strategies remain preferable to outright duration exposure.
Also read: The Real Problem With Japan’s Bond Market
The US: rangebound rates with no clear inflection point
China advocating for a shift in US Treasury holdings does not materially change the trajectory for US rates. Instead, it reflects a gradual diversification trend, with the core drivers unchanged. The fiscal impulse remains large, inflation risks are asymmetric, and political pressure on the Federal Reserve persists just as term premia continue to rebuild.
Last week’s softer labour data offered a brief glimpse of long-end demand, but a sustained rally would require a genuine macro shock – a sharp labour market deterioration or a major risk-off event. Absent that – and our base case – the US curve remains vulnerable to further bear steepening and ongoing long-end volatility.
The UK: Political risk premium overshadows easing
The UK opportunity set looks more promising but remains constrained. Inflation is cooling from elevated levels, growth momentum is soft, and the Bank of England is approaching the point where policy can shift to a more supportive stance. Fiscal policy is also more constrained than in the US, limiting the risk of a renewed inflation impulse – or worse, another gilts crisis.
But structural pressures persist. Pension demand is less price-insensitive than in prior cycles, term premia remain sticky, and heightened political uncertainty continues to demand compensation at the long-end – even if a leadership challenge is avoided in the near-term.
As a result, the UK is not yet a clean long-end hedge. The belly of the curve remains the sweet spot, where valuations are more compelling, carry dynamics are stronger, and there is scope for additional rate cuts to be priced. Long-end gilts can still play a tactical role, but conviction remains limited until political clarity improves – leaving our 4% 10y year-end forecast skewed to upside risks and further curve steepening on tap.
What’s left? Europe, sort of
Europe stands out – not because supply pressures are absent, but because it remains the destination where duration has the highest probability of working when you need it. The ECB’s reaction function is clearer than its peers, inflation expectations remain anchored, and downside growth risks are more visible than upside surprises – all factors preserving duration’s hedging role in drawdowns.
That said, supply remains a near-term headwind as elevated issuance and ongoing ECB balance sheet reduction mean the marginal buyer is increasingly price-sensitive, keeping upward pressure on bund yields. And upside growth and inflation risks can build from Germany’s spending spree.
After a muted 2025, Germany’s fiscal expansion is set to accelerate meaningfully in 2026 – the intended inflection point of the debt-brake reform. With budgets passed and funding vehicles now operational, infrastructure and defense spending is now ramping up, with early signs of transmission already visible in rebounding manufacturing and defense-linked orders.
As a result, bund yields have scope to move structurally higher before duration fully works again. We expect 10y bund yields to reach around 3.15% by year-end with upside risks. Europe may offer the cleanest hedging properties – but not necessarily the best entry point.
Place your best bets
So where did our global strategy team land on duration? Maybe Switzerland and Sweden – where fiscal solidity and limited issuance continue to support valuations. But finding conviction around that consensus? Well, that’s as hard as trotting the globe to find the best duration bets.
