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, pointed out in a recent report that the market currently expects the Bank of England and the European Central Bank to each raise rates up to three times, “which is an amazing shift in just a few weeks.” According to relevant market data platforms, the market 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 (bond yield) curve has led to a steep bear 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 interest rate activities seem to have overshadowed the impact of rising geopolitical risks amid the US-Iran conflict.

Recent data shows a dramatic adjustment in the policy expectations of major global central banks: conflicts in the Middle East have pushed up energy prices, increasing risks of imported inflation, 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 UK 10-year government bonds has risen to around 4.92%, indicating accelerated pricing for interest rate hikes in the bond market.

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

Mitch Reznick’s views are highly consistent with the current market consensus. He has repeatedly emphasized in recent fixed income outlooks 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 translated into consumer and business costs, forcing central banks to reassess their interest rate trajectories.

Behind the bear flattening of the yield curve is a rapid response to interest rate hike expectations at the short end. Investors selling short-term bonds have driven up front-end yields, while the long end is suppressed by expectations of economic slowdown, leading to a clear narrowing of spreads. This dynamic not only amplifies volatility in the bond market but may also transmit to the stock and foreign exchange markets: currencies like the yen and euro may experience short-term pressure relief, but the financing costs in emerging markets may rise in stages.

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

Editor Summary

The rapid reversal of interest rate hike expectations reflects the decisive impact of inflation risks on monetary policy, while the bear flattening of the yield curve further corroborates the market’s accelerated pricing for short-term tightening. Short-term volatility in the global bond market is likely to remain high, while the medium- to long-term trend still depends 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.