US inflationary pressures likely to be stemmed by rising productivity
James Bilson, Fixed Income Strategist, Global Unconstrained Fixed Income, Schroders, outlines how our scenario-based approach has served us well since its adoption back in mid-2023. The turn of a new year provides a good opportunity for us to refresh our scenarios to ensure they remain relevant as we enter a new phase for the economy.
Our new scenarios continue to reflect the state of the economy and remain defined in terms of how the US Federal Reserve (Fed) would respond to each 1. However, extending the number to four (previous three) allows for greater differentiation vs our previous "soft landing" outcome.
With these newly defined scenarios, we continue to see a low probability of the two tail-risks – the economy running "too hot" or "too cold" – and for now place an equal probability of it being "just right" or "warming up". This is consistent with our view that the US economy does not require additional stimulus despite there being a clear desire in some quarters for the central bank to provide it anyway.
Scenarios: an equal probability of the economy being "just right" or "warming up"
“Harder, Better, Faster, Stronger”
In fact, Daft Punk inadvertently summed up the US economy well. Over recent months, we have been upbeat on US growth, while being sanguine on the inflation outlook. We’re seeing tentative signs of improvement in the labour market, assuaging concerns over the weakness we saw in the second half of 2025. Consumption has remained robust; however, significant inflationary pressures are likely to be stemmed by rising productivity.
Opportunities globally
Despite lots of geopolitical noise, we also have largely unchanged views in terms of our outlook outside the US. We see little impetus for the European Central Bank or for the Bank of Canada to change rates in either direction in 2026. We favour long positions in both of these rates markets versus the likes of the US.
Meanwhile, UK gilts are a favoured long exposure, given that the Bank of England is playing catch up to its peers and has the ability to lower interest rates further.
Nevertheless, the main action over the past month has been focused in Asia, especially Japan. Promises of greater fiscal spending and a new election have seen both Japanese rates and the yen sell off meaningfully. Given the importance of Japanese rates and investor flows for global bond markets, we are monitoring this situation carefully and have a neutral score on overall rates.
Finally, we have shifted to a neutral stance on US yield curve positioning, having previously favoured a steepening bias (i.e. being positioned for the outperformance of shorter maturities versus long term rates). With more competing crosswinds and less visibility than in previous months, we see better opportunities to deploy our risk budget elsewhere.
A shift in asset allocation
We have favoured agency mortgage-backed securities (MBS) in the US for some time. Recent policy proposals by the Trump administration for government-sponsored enterprises to use up to $200 billion to buy MBS from the open market, in an attempt to improve housing affordability, has seen these spreads (over Treasuries) tighten significantly. This has benefited our overweight stance, but now leads us to downgrade the outlook from here to neutral as the valuation advantage is eroded.
We remain cautious on corporate credit, both investment grade and high yield, despite the supportive macro environment given tight spread levels (i.e. little difference in yield versus government bonds). However, we see some attractive opportunities arising in areas such as Eastern European sovereign debt.
1 With the US remaining one of the main drivers of the global economy and financial markets, our scenario scores are focused here.