The yield curve flattens bearishly, and inflation expectations pressure the Bank of England and the European Central Bank to potentially raise interest rates three more times each.

Huitong Finance APP News—— According to Huitong Finance APP, Mitch Reznick, head of fixed income at Federated Hermes, noted in a recent report that the market currently expects both the Bank of England and the European Central Bank to raise interest rates up to three times each, “which is an impressive shift in just a few weeks.” According to relevant market data platforms, the market currently also reflects expectations that the Federal Reserve will raise rates by about half a time this year.

Mitch Reznick emphasized, “The sell-off at the front end of the yield curve has led to a sharp bear market flattening,” meaning that short-term bond yields are rising significantly faster than long-term bond yields. He further stated that concerns about inflation and the resulting central bank rate activities seem to have overshadowed the impact of rising geopolitical risks due to the conflict between the U.S. and Iran.

Recent data shows a dramatic adjustment in expectations for major global central bank policies: Middle Eastern conflicts have pushed up energy prices, increasing imported inflation risks, and the market has quickly shifted from easing expectations to tightening pricing. The current policy rate of the Bank of England remains at 3.75%, the European Central Bank’s deposit rate is 2.0%, while the Federal Reserve’s federal funds rate range is 3.50%-3.75%. In the short term, the yield on the UK 10-year government bond has risen to about 4.92%, indicating an acceleration in the pricing of rate hikes in the bond market.

The following is a comparison of the latest 2026 rate hike expectations from major central banks:

Mitch Reznick’s views are highly consistent with the current market consensus. He has repeatedly emphasized in his fixed income outlook that the uncertainty of the inflation path has become the dominant factor; while geopolitical events cause short-term disturbances, the sustained rise in energy prices has directly transmitted to consumer and business costs, forcing central banks to reassess their rate trajectories.

Behind the bear market flattening of the yield curve is a rapid response to rate hike expectations at the short end. Investors are selling short-term bonds, driving up front-end yields, while the long end is suppressed by expectations of economic slowdown, clearly narrowing the spread. This dynamic not only amplifies volatility in the bond market but may also transmit to the stock and currency markets: currencies like the yen and euro are temporarily under pressure, but emerging market financing costs may rise in stages.

However, expectations are not set in stone. If the conflict in the Middle East quickly eases or energy prices fall, the central bank’s rate hike path may be adjusted again. Investors need to continue tracking the Bank of England’s April meeting, European Central Bank policy signals, and updates to the Federal Reserve’s dot plot, while also paying attention to global inventory and supply chain data.

Editor’s Summary

The rapid reversal of interest rate hike expectations reflects the decisive impact of inflation risks on monetary policy, and the bear market flattening of the yield curve further confirms the market’s accelerated pricing for short-term tightening. The volatility of the global bond market is likely to remain high in the short term, while medium- to long-term trends will still depend on the actual path of inflation and the evolution of geopolitical situations. Market participants are advised to maintain flexible allocations and closely monitor marginal policy changes.

(Edited by Wang Zhiqiang HF013)

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