Middle East – U.S. enters war
The U.S. joined the war over the weekend, launching airstrikes on Iranian nuclear sites alongside Israel. In response, Iran threatened to shut the Strait of Hormuz. Brent is already up roughly 20% this month but remains highly volatile and reacts quickly to every escalation or de-escalation headline. That said, markets remain largely indifferent for now, with reactions far more muted than media coverage.
FED – On hold with dovish dots
The Fed held rates at 4.25–4.50%, with the 2025 dot still showing two cuts—slightly dovish versus expectations. Growth in 2026 was revised down to 1.6% (from 1.8%), while the unemployment rate edged up to 4.2% in 2026 and 4.1% in 2027 (+10 basis points each). Core PCE was revised slightly higher. Risk tilts are now more balanced: downside risks to GDP and upside risks to inflation and unemployment have moderated. Markets initially reacted dovishly, with 2Y yields falling around 4 basis points, but reversed as Powell emphasised the need for “harder data” before easing. The Fed is in wait-and-see mode, but the bar for cuts is lower.
Central Banks – Hikes, holds, and hidden signals
Brazil’s Copom surprised again, hiking the Selic rate another 25 basis points to 15% and warning it will stay at that level for a “very prolonged” period. The tone, however, was dovish, which muted the yield reaction. In the UK, the Bank of England held the Bank Rate at 4.25% on a 6–3 split, with a dovish tone evident in both the vote and the press release. In Japan, the BoJ kept its reference rate at 0.50% but will slow bond-purchase tapering to 200bn Yen per quarter. Meanwhile, the Finance Ministry slashed long end JGB issuance and shifted supply to the front end: they want to cool super-long yields without derailing normalisation.
Algebris Investments’ Global Credit Team
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