Global Credit Bullets | Monday, 27th July 2026

ECB – September hike in sight

Last week, the ECB left its key policy rates unchanged, as widely expected. With oil and gas prices now back close to the baseline scenario, President Lagarde delivered the partially hawkish message that investors had anticipated, noting that some Governing Council members had considered an immediate rate increase. At the same time, she reiterated that future decisions would remain data-dependent and would be taken on a meeting-by-meeting basis, given the rapidly evolving situation in the Middle East. The market now sees September as the most likely timing for another hike, with the probability currently priced at around 90%. Against this backdrop, the rates component in the Euro area appears to offer better value, particularly as the market is already pricing more than two rate hikes over the next year.

Iran – Higher oil, higher risks

Last week was marked by a significant escalation in the Middle East. After remaining largely on the sidelines during the tensions in March, the Houthis took an important first step, threatening to close the Bab el-Mandeb Strait and targeting Saudi-linked tankers.

Oil prices briefly returned to around USD 100 per barrel, prompting a renewed sell off in global rates. For the moment, however, the market reaction has remained predominantly as rates move rather than a broader sell off across risk assets.  A further escalation and a sustained increase in energy prices would create renewed pressure on energy-sensitive sovereign credits. Egypt and Turkey appear particularly exposed, as their current-account balances would be negatively affected by higher energy-import costs. Within the Gulf, Bahrain remains especially vulnerable to any prolonged disruption to traffic through the Strait of Hormuz or to further missile exchanges. Its already weak fiscal and macroeconomic position is coming under increasing pressure, while adverse current-account flows could weigh further on reserves and ultimately require additional GCC financial assistance.

Nonetheless, another “TACO” moment from President Trump cannot be excluded. With 10yr Treasury yields already at recent highs, a further rise in oil prices combined with continued weakness in equity markets would likely increase political and financial pressure to de-escalate, as has often occurred during previous periods of market stress.

Fed – A meeting-by-meeting regime

This week will feature one of the least predictable Federal Reserve meetings in recent years. The absence of clear forward guidance, combined with mixed signals from FOMC members, has created considerable uncertainty around both the immediate decision and the policy outlook.

Traditional policy frameworks, including the Taylor Rule, would suggest that US interest rates should be materially higher, particularly given the continued strength of nominal growth. Although the latest CPI and non-farm payroll reports provided some relief, markets have continued to price a more restrictive policy path. More than two rate hikes are currently priced across the next several meetings. Beyond the near-term rate decision, the size and future direction of the Federal Reserve’s balance sheet will remain a central issue over the coming months. Warsh has previously been highly critical of the scale of the balance sheet, but any aggressive reduction would need to be implemented with great care, given the potential consequences for markets. 

Algebris Investments’ Global Credit Team