Major European investors are pushing back against abrupt swings in bond-market pricing that have disrupted expectations about when central banks might cut or raise interest rates.
Portfolio moves by some of the region's largest managers come as energy prices rallied after the U.S.-Israeli war against Iran, briefly sending oil toward $120 a barrel and prompting traders to reconfigure the outlook for policy moves by the Bank of England (BoE) and the European Central Bank (ECB).
Amundi, Europe’s largest asset manager, has been buying short-dated British and Italian government bonds, while Allianz Global Investors increased a position favoring longer-dated UK bonds, senior fund managers reported. The shifts reflect a broader tendency among big investors to resist what they view as an overreaction by markets to recent geopolitical shocks and attendant inflation risk.
Market pricing swung sharply within days. On Monday, as oil surged, traders briefly put a high probability on the BoE hiking rates this year after previously betting on a cut this month. By Tuesday, as oil retreated, traders reverted to pricing roughly a 50% chance of a Bank of England rate cut by year-end. The ECB's market pricing also flipped: traders priced in as many as two 2026 rate hikes at one point on Monday, after having given a sizeable chance of a cut just weeks earlier. By Tuesday the market was pricing around a 70% chance of one ECB rate rise by December.
Gregoire Pesques, chief investment officer at Amundi, said the firm sees value in fading the short-term market moves. "It’s too early for central banks to act. So, we tend to fade this short term. If the market is pricing hikes like it is, I think it’s a good value proposition," he said. Pesques noted that many of the recent market moves stem from traders unwinding positions held before the geopolitical shock that were bullish on bonds.
Inflation fears have hit UK and euro-zone government bonds particularly hard because of Europe’s dependence on energy imports. Interest-rate sensitive two-year yields have risen by roughly 30 basis points in both Britain and Germany as bond prices fell, prompting some investors to see short-dated paper as attractive on valuation grounds.
Pesques has added UK two-year bonds and two-year Italian bonds to Amundi's holdings while selling 30-year debt. Separately, Ranjiv Mann, a senior portfolio manager at Allianz Global Investors, said he increased a position that favours 30-year British bonds relative to U.S. Treasuries last week. Mann expressed the view that the Bank of England will still cut rates in 2026.
"Clearly, in the short term, markets are questioning some of that (Bank of England rates) pricing, but we think the underlying backdrop still remains supportive for gilts relative to other markets," Mann said, pointing to a weakening labour market, easing inflation and tight fiscal policy as supportive factors.
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Investors who favour fading short-term rate repricing are taking positions that reflect both valuation arguments and their reading of the economic backdrop. The recent episodes of heavy repricing underscore how sensitive markets remain to energy-price swings and the speed with which traders can flip between scenarios for central-bank moves.
Those dynamics are likely to keep traders and asset managers active across short and long parts of government bond curves as they seek to position for both immediate volatility and the medium-term policy path anticipated by managers.