NatWest’s top themes related to fixed income and yield curves for the year ahead are as follows:

Fiscal’s Long-COVID and Its Impact on Yields: The continuation of large fiscal deficits is expected to keep upward pressure on interest rates, affecting the level of yields and the shape of yield curves. This fiscal pressure, termed as “fiscal’s long-COVID,” is anticipated to play a significant role in determining the direction of fixed income markets.

Monetary Policy and Terminal Rates: As major central banks approach their terminal rates, the fixed income market will be influenced by the differing paths and timing of rate adjustments across regions. This divergence in monetary policy will affect yield curves, with a focus on how quickly rates are cut and the final levels reached by central banks like the Federal Reserve, Bank of England, and European Central Bank.

Geopolitical Risk and Protectionism: Rising geopolitical tensions and protectionist policies are expected to impact global supply chains, potentially resulting in higher inflation and influencing central banks’ interest rate decisions. This environment could lead to increased volatility in fixed income markets and shifts in yield curves.

Inflation and Central Bank Responses: While inflation is currently falling, there are concerns that it may remain higher for longer due to geopolitical and fiscal factors. Central banks’ responses to inflationary pressures will be crucial in shaping yield curves, as they balance rate cuts with inflation targets.

US Fiscal Policy and Its Global Implications: Under the Trump administration’s proposed economic policies, including significant fiscal stimulus and aggressive tariffs, there could be substantial effects on interest rates and yield curves, not only in the US but globally. The interplay between fiscal policy and monetary policy will be closely watched by fixed income markets.