LDI 2025 - Semi Annual Outlook

HIGHLIGHTS

In the current market phase, one common feature within LDI players has been to adopt a cautious approach towards the long end of the curve. In fact, the magnitude of the global yield curve steepening trend seen across major developed markets, driven by monetary policy, growth, and fiscal sustainability, coupled with supply/demand, has proved to be a fundamental disincentive to buy long dated assets, and this trend is expected to continue. 

Meanwhile, while at the short end markets are implying less than two rate cuts in the US and one in Europe before the end of the year, in the longer end of the US curve further term premia repricing could be required, mirroring concerns over fiscal sustainability and issuance ahead. In Europe, further clarity over the timing and extent of the issuance wall needed to fund defence and infrastructure spending in Germany will also influence market moves across the yield curve, in a context where, however, net Euro government bond issuance for H2 (net of QT) is currently seen as less impactful than in the first half of the year. As a result, we expect that both US and EUR 10-year rates will continue to move within a range for the time being, while being more susceptible to upward pressure in the longer term. The recent pressure arising from Japan’s long end of the curve will also likely continue to add steam to the global steepening trend.

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