Rates Spark: Geopolitics in Focus Ahead of US CPI

World Economy News — 10/08/2026

Everything Hinges on Two More US CPI Readings

US rates ended last week with a dovish tone following weak payroll numbers, but the upcoming CPI figure is expected to be more consequential. The Consumer Price Index is one of the two primary inflation gauges the Federal Reserve watches — alongside the Personal Consumption Expenditures price index — and carries particular weight in shaping rate expectations. Ahead of the Federal Reserve's September meeting, only two more CPI readings remain. Markets are still weighing the Fed's next move, with approximately a 40% probability of a hike currently priced in.

The limited price action following the negative payrolls report — despite the disappointing figures — suggests that market attention remains firmly centered on inflation.

A benign CPI print could ease concerns about Fed Chair Kevin Warsh steering the central bank into overly dovish territory, which would likely pull longer-duration rates lower as well. That said, long-term inflation expectations, as measured by 5Y5Y forward inflation swaps — which capture the market's view of average inflation over a five-year period starting five years out — appear notably benign. The current trading range sits well below the 2025 average, even though oil prices have risen significantly since then. Real rates are therefore the primary driver behind higher US Treasury yields. Softer inflation data could also translate into lower real rates, as falling inflation would suggest the neutral rate — the theoretical rate that neither stimulates nor restrains the economy — may be below the 4% currently implied by markets.

Bunds Offer Limited Shelter From Geopolitical Risks

German government bonds, or Bunds, have traditionally served as the eurozone's benchmark safe-haven asset, tending to outperform during periods of market stress. However, the 10-year Bund yield appears settled in a 3.1%–3.2% range, and absent a major oil price move, significant shifts appear unlikely. Despite considerable geopolitical uncertainty on the horizon, Bunds show no signs of safe-haven demand. A more pronounced outperformance of Bunds versus swaps was observed only at the onset of the Iran conflict in March; those dynamics have not reappeared.

Part of this may reflect strong sentiment in risk assets. With stock-bond correlations in positive territory — meaning bonds and equities are moving in the same direction rather than offsetting each other — holding longer-dated rates does not offer a reliable hedge. If anything, an improving growth outlook poses greater upside risk to euro rates.

Gilt Yields Look Elevated, but Oil Volatility Complicates Positioning

UK government bonds, known as Gilts, have been under pressure as the Bank of England contends with inflation that has proven stickier than in the US or eurozone. The 10-year Gilt yield has also remained range-bound, fluctuating between 4.8% and 5.0% over recent months. However, a more bullish stance on sterling rates appears warranted.

Markets are still pricing in nearly two additional rate hikes from the Bank of England. More notably, the curve does not reflect a meaningful easing cycle thereafter. The 2Y1Y forward rate stands at 4.25%, implying an estimated neutral rate well above that of the US. Given that the UK's potential growth is materially lower, such levels do not appear justified.

Trading this view, however, remains challenging: any oil price movement could quickly turn a dovish position into a loss, as energy costs feed directly into headline inflation and complicate the central bank's policy path.

Source: ING via Hellenic Shipping News