Will markets surprise again in 2026?

In 2025, he imposed even more aggressive and inflationary import tariffs than already feared, but with surprisingly little effect on economic growth. Meanwhile, the European Central Bank cut rates more than the US central bank. One would therefore expect US rates to rise, and European rates to fall. However, ten-year interest rates in the US declined by 0.5% last year, while ten-year interest rates in Europe went up by 0.5%.

How could bond markets surprise investors this way? Investors in European bond markets were shaken by the sudden prospect of much higher government bond issuance in Europe to fund a huge increase in defence spending, for which the urgency only keeps increasing. In the US, a similar increase in future government bond issuance, to fund President Trump’s Big Beautiful Bill related to spending and taxes, seemed to be considered business as usual. The gravitational pull of US policy on Europe, which depends on the US in so many areas, seems to have pushed up European interest rates in the direction of still much higher US interest rates.

Another important element in 2025 was central bank policy, where rate cuts in Europe occurred early in the year and were already fully expected by investors. In the US, the Federal Reserve delivered on increasing expectations for rate cuts towards the end of the year, as inflation remained surprisingly benign.

Like most investors, we do not expect the European Central Bank to change rates this year. However, we expect the US Fed to cut rates in 2026 more than investors expect for now, leading to lower short-term rates. Investors should become more careful as Trump will be appointing a loyal new Fed Chair soon. He will likely try to increase his grip on Fed policy before the midterm elections in November, which have the potential to cripple his political power. Meanwhile, events in Venezuela showed us that geopolitical risks in 2026 are likely to remain extremely high.

US Inflation is expected to remain stickier than suggested by the most recent inflation numbers, which were still flawed by the US government shutdown. While investors will obviously scrutinize this week’s employment data, next week’s US inflation data may be even more important. It seems more likely for US ten-year interest rates to rise than for European rates to go up in 2026. But we could always be surprised again.