Geopolitical uncertainty, energy scarcity, and large fiscal deficits are shaping a new economic environment characterised by a restrictive monetary policy. However, the wealth management firm A&G believes that financial markets are pricing in a scenario of excessively high interest rates for an excessively prolonged period.
According to Germán García Mellado, flexible fixed income manager at A&G, the current context in 2026 is profoundly marked by geopolitical tensions and the rise in oil and gas prices. This outlook has pushed central banks to adopt more defensive stances to avoid second-round effects on underlying inflation.
The United States and the challenge of the Federal Reserve
In the United States, the Federal Reserve (Fed) has eliminated forward guidance to adopt a data-dependent strategy, meeting by meeting. Although this generates greater volatility in the short term, the explicit intention to reduce the balance sheet —especially in the long term— provides independence from the Treasury.
A&G emphasises that the market is considering terminal rates between 4.5% and 4.75%, levels they consider disproportionate for the US economy unless growth accelerates unexpectedly. Therefore, they see opportunities in the middle segment of the curve and advise caution in long-term bonds due to high sovereign issuances and reduced demand from foreign buyers such as China and Japan.
The Eurozone facing a preventive tightening
On its part, the European Central Bank (ECB) has implemented preventive rate hikes due to the energy fragility of the continent and the fear of repeating the delays of 2022. However, A&G warns that the European economy lacks the traction of the US economy. The combination of tighter credit and rising energy costs will ultimately weigh on growth, forcing the ECB to reverse projected increases and set terminal rates around 3%, far from the 3.40% or 3.60% that the market has reached.
In light of this scenario of volatility and expected regulatory changes in the ECB Governing Council for 2027, the firm recommends positioning in the short and medium segments of the European curve and avoiding longer-term references and countries with higher levels of debt.
