Fixed Income Briefing July 2026

US Economic and US Treasury Market Review

▪ The dollar was, prior to the Fed decision on 29 July, showing resilient strength and staying near one-month highs on a hawkish Federal Reserve outlook. The PCE at 4.1% in May, more than twice the Fed’s 2% target and a sharp rise in oil prices following the collapse of the ceasefire with Iran as well as Iranian and Iranian backed Houthis attacks on ships in the Strait of Hormuz and the Red Sea, raised inflation expectations and provided safe haven demand. However, the dollar dropped following the 9-3 decision by the Fed to keep rates on hold at the July meeting. The dollar index is down by over -0.20% MTD in July.

▪ On the growth front, US economic data released in July suggest that the US economy is experiencing cooler consumer price inflation and a relatively steady labour market. The US Bureau for Labor Statistics showed that the US labour market in June 2026 added 57,000 non-farm payroll jobs and the national unemployment rate came in at 4.2, slightly lower than May’s 4.3%, falling to 4.2%. Average hourly earnings rose by 0.3%, but are up by 3.5% y/o/y.

▪ Business activity rose again in July, however the S&P Global Flash US PMIs were mixed. The Flash Composite PMI came in at 53.6, up from June’s 51.9 and an 8-month high. Manufacturing came in slightly below expectations and services were materially stronger. The Flash Manufacturing PMI eased to 53.8, below consensus of 54.3 and down from June’s 53.9, hitting a 4-month low. The Flash Services PMI rose to 53.6 from 51.2, well above the 51.3 expected and its strongest level in eight months. The report pointed to renewed momentum from FIFA World Cup-related spending, firmer 4 July demand and increased business investment, although exports remained under pressure. Supplier delays worsened to their most severe level in nearly four years amid the Middle East conflict, while input-cost inflation reached a 14-month high and selling-price inflation approached a four-year peak. Employment recovered after two months of declines. Business output expectations improved to an eight-month high, but with diverging sector trends.

▪ On the consumer side, the preliminary July reading of the University of Michigan Consumer Sentiment Index rose to 54.4 in July 2026, up 9.9% from June’s 49.5 and reaching its highest level since February. Headline CPI in June fell to a seasonally adjusted 0.4%, bringing the annual inflation rate down to 3.5% according to the Bureau for Labor Statistics. Core inflation was flat on the month, putting the annualised rate at 2.6%, down from May’s 2.9%. The energy index slumped 5.7% in June, its biggest monthly drop since April 2020. However, it still rose 15.7% on an annualised basis, primarily attributable to the 26.7% rise in gasoline. Services costs, which are closely watched by Fed policymakers as an indicator of longer-run inflation trends, moderated significantly. Services costs were flat, with shelter rising just 0.1% and transportation services posting a 0.3% decline.

Yield swings

July was a confusing month for bond markets. Longer term bonds hit multi-decade high yields, creating downward price pressure, driven by persistent inflation concerns, new US tariffs and heavy sovereign borrowing. The US yield curve saw the long end continue to rise, with the 30-year hitting its highest yield since 2007 after the Fed held rates on 29 July. As noted by Bloomberg news, the $31 trillion Treasuries market is down more than half a percentage point in July and real rates have risen, suggesting that the neutral rate will need to be higher. In the UK, concerns around rising energy prices and inflation expectations as well as domestic fiscal uncertainty as new Prime Minister Andy Burnham took office, has caused gilt yields to rise. However, the Bank of England is expected to keep rates on hold at its July meeting today, with the market increasingly expecting a quarter-point hike by November and another one by March 2027. Markets are still pricing in a September rate increase by the ECB, following its policy tightening in June and its hold in July.

The US 10-year yield is +31 basis points (bps) from a month ago. The 10-year German Bund is +32.8 bps. The spread between the two has fallen from 158 bps at the end of June to 150 bps as of 29 July, reflecting expectations that the ECB may need to raise rates faster than the US given its dependency on imported energy and the volatility in oil prices over the past month. On the long-end of the curve, the US 30-year yield is +34 bps from a month ago, while the German 30-year yield is +21.8 bps from a month ago. 

Source: Factset

Source: Factset

Source: Factset. FactSet 5:00 pm EST 29 July 2026

Global Economic and Market Review

The eurozone is showing signs of recovery. Eurozone headline inflation was 2.8% in June, down from 3.2% in May. Eurozone activity rebounded more strongly than expected. The S&P Global Eurozone Flash Composite PMI rose to 51.9 from 50.0, above consensus of 50.3, marking the first expansion in four months and the strongest reading since before the US war with Iran began. Manufacturing output accelerated to a 52-month high of 53.0, while the headline manufacturing PMI rose to 52.0 from June’s 51.4. Services returned to expansionary territory, coming in at 51.6, up from June’s 49.4. New orders increased for the first time in five months and at the fastest pace since April 2023, supported by only a marginal decline in export orders. Employment also rose for the first time in 2026. Germany returned to growth, France’s contraction moderated and the rest of the region recorded its strongest expansion in eight months. Softer input-cost inflation and easing supply disruptions allowed manufacturers to rebuild stocks, although S&P Global warned that higher oil prices and shipping risks could revive inflation pressures and challenge the recovery.

European consumers are also becoming more confident. According to the European Commission, the flash estimate of the consumer confidence indicator improved for the third month in a row, up 1.9 percentage points from June, to -15.1. However, consumer confidence has not yet recovered the losses incurred since February and remains below its long-term average. The ECB’s wage tracker indicates negotiated wage growth with smoothed one-off payments of negotiated wage growth of 2.3% in 2026 and of 2.7% in the first quarter of 2027. For 2026, the headline ECB wage tracker averages 1.8% in the first quarter, 2.1% in the second quarter and 2.6% in the third and fourth quarters.

As expected, the ECB kept its key policy rates on hold at its meeting in July. The statement preserved the bank’s longstanding data-dependent approach, while making several adjustments to policy language. Energy prices have been highly volatile since the June decision and although the statement offered few signals on the future policy path, markets continue to price in further ECB tightening in September as even ECB President Christine Lagarde said, ‘The full effects of the energy shock have yet to play out.’

In the UK, activity also improved, with the Flash Composite PMI rising to a three-month high of 52.1 from 49.3, above the 49.8 expected. Services recovered to 51.8, while manufacturing strengthened to 52.8. The rebound was supported by a modest increase in new work, stronger consumer services demand and more upbeat business expectations. However, hiring appetite remained limited, particularly in services, as firms continued to manage cost pressures and uncertainty linked to renewed geopolitical tensions.

Headline inflation in the UK came in at 2.6% in the 12 months to June 2026, down from 2.8% in the 12 months to May. This was the lowest rate since March last year according to the Office for National Statistics data. This was largely attributed to lower food, petrol and diesel costs. Services inflation slowed to 3.6% from 3.7%, slightly higher than forecast. Core inflation was up in May, rising 2.6% annualised, up from 2.5% in April; the CPI goods annual rate slowed from 2.4% to 2.0%, while the CPI services annual rate rose from 3.2% to 3.7%. According to the Office for National Statistics (ONS) July 2026 release, the unemployment rate is 4.9%. The economic inactivity rate was estimated at 20.9% in March to May 2026. This is down 0.1 percentage points on the year and down 0.1 percentage points on the latest quarter. 

The early estimate of payrolled employees for June 2026 decreased by 71,000 (0.2%) on the year, but was largely unchanged on the month. The estimated number of vacancies in the UK decreased in the latest quarter. Early estimates for April to June 2026 suggest a decrease of 7,000 (0.9%) to 712,000, compared with January to March 2026.The labour market is becoming increasingly fragile with job vacancies falling 19,000 over the quarter and down 31,000 on an annual basis.

Things to think about

Markets are still pricing in interest rates rises as investors consider ongoing and future geopolitical disruptions. There is also the impact of corporate bonds to consider, with a greater correlation with AI equities potentially influencing the performance of those AI related bonds and the wider market. The competition for capital will remain strong as governments in the US, UK, Europe and Japan will continue to issue debt to finance persistent deficits and potentially, in the case of the US, to cover increased defence expenditures, putting additional upward pressure on the longer end. In the US, Fed Chair Kevin WarshF vowed not to “waver” against persistent inflationary pressures. With the number of dissenters from a rate hold growing to three, up from June’s two, and with long term bond yields continuing to rise, the Fed will likely need to put out more hawkish messaging if it hopes that the market will continue to tighten bond yields without the Fed having to take direct action.

Although the secondary effects of the war with Iran are still to fully manifest, there is the threat that oil prices could jump further if shipping routes out of the Gulf remain blocked. Credit is expected to remain tighter for longer, driven by continuing geopolitical risks, energy-sector cost pressures, and cautious central bank stances. The Bank of England will remain data-dependent, but with the respite for consumers from falling inflation likely to be brief due to the announced 13% increase in the price cap that sets household energy bills, there will be increasing pressure on the MPC. However, slowing wage growth and slack in the labour market may be enough to hold off on a rate rise until at least September. The potential fiscal policies of the new Prime Minister, Andy Burnham, remain speculative and not fully costed. However, it is being reported that his government may seek to raise a mix of taxes, despite the negative impact that it may have on growth. Traders should also be looking closely at how it is interpreting the former government’s fiscal rules.

Risk premiums will be driven by persistent inflation and heavy capital spending pressures. Geopolitical uncertainty is still high; there is still a chance that there could be an escalation in the war with Iran and/or that it could be drawn out further than currently anticipated, causing the market to price a more aggressive Fed next year. Investors may wish to consider selective yield-spread targeting, continuing to diversify across geographies to reduce country-specific risks. With central banks generally adopting a more hawkish tone and yield steepening likely to continue, short-duration paper looks increasingly attractive as real yields rise. Additionally, they may wish to use inflation-protected securities (e.g., TIPS) to hedge inflation risk.

Key risks

▪ Inflation risks continue to rise, further undermining consumer and business confidence. The full second order impacts from the war with Iran are still not fully felt. Tariffs are back with the Trump administration now trying to implement section 301 tariffs against 60 countries. The administration will also continue using Section 232 tariffs, in the automotive, steel, aluminium and pharmaceuticals sectors. The tariffs from H1 have mostly passed through but this new round of tariffs will push up price pressures towards the end of the year.

▪ Policy uncertainty. The central banks may get the timing of rate hikes wrong or we may see a faster divergence in policy than currently considered due to fragile geopolitical energy dynamics. The shift in Fed l communication will likely raise the potential for greater volatility. Fiscal stimulus changes amid domestic political pressures, especially those expected to emerge in the UK under the Burnham government, may create additional volatility in gilt markets.

▪ Geopolitical tensions, re-alignments and events. The revival of tariffs by the Trump administration may result in retaliatory measures by at least some of the countries affected and/ or re-alignments in Europe and/or Asia which can quickly shift safe-haven demand and risk premiums. Geopolitical risk stemming from the Iran war, the threat to Taiwan from mainland China, the increasingly aggressive behaviour by the Chinese navy in the South China Seas, the potential continuation of US military and political activities in Latin America and the ongoing war in Ukraine, all have the potential to hit supply chains and shock economies with the consequent effects on inflation, bond yields and currency valuations.