Across the UK and euro area, we see scope for further interest-rate cuts to support government bonds in the year ahead. In Europe’s credit markets—both investment grade and high yield—we think the positive factors that have driven strong 2025 performance remain in place. Meanwhile, technology—and the potentially transformational effects of AI—may present new risks and opportunities for European fixed-income investors in 2026.

The Case for Lower Rates

While the market is looking for UK interest rates to fall further in 2026, it expects that euro-area rates have stabilized and that the next move will be up. We disagree.

Several factors threaten to push euro-area inflation below the 2% target, for instance: formerly sticky wage and services inflation continue to slow; the euro remains strong, hurting Europe’s exporters; and after the trade wars, Chinese exports are rerouting from the US to Europe and depressing prices.

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