Live from the Trading Floor: Views on Global Rates, FX, and EM

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Brady Leventhal: Hi and welcome to J.P. Morgan’s Making Sense. I'm your host, Brady Leventhal, head of North America Foreign Exchange Sales for hedge funds. Today we are going to be discussing our recent Global Macro Conference where we had nearly 300 clients registered in our new headquarters in New York City. This is our 10th annual Global macro conference that J.P. Morgan has hosted. With me today I have Matthew Franklin Lyons, head of Global Rates Trading and Fixed Income Financing. And Steven Jeffries, head of currencies in emerging markets and FX services trading. Welcome Matt and Steve.

Stephen Jeffries: Hi Brady. Thanks for having us.

Brady Leventhal: So we were all on a panel together called, “Risk and Reward: Live from the Trading Floor,” where we tried to shed some light on our key risk views and opportunity sets for 2026. I made the joke on stage that, uh, people thought we were actually going to be live from the trading floor, so I guess this is sort of our second chance to do that. So anyway, our timing was great. Um, you know, we were emerging from a, the longest shutdown in U.S. government history. We've got a lot of data to come. And definitely interesting questions on the Fed. So you both were kind enough to discuss your views on markets and opportunity sets on stage. I'd love to recap the highlights here today. So, Matt, could you kick us off and discuss the main drivers in your market?

Matt Lyons: Sure. So this year is best summarized by examining either sides of the global yield curve, steeper, which occurred across many currencies, but certainly a dollar euro, UK, Japan, call it between 50 and a hundred bps, front to back yield curve, steeper, and I think beneath the surface there's some quite intuitive things happening. In the far end, of course, central banks delivered cuts from moderately restrictive policy rates down closer to what they believe to be neutral, and then further out the curve supply, demand mismatches, and the shifting composition of demand side for sovereign debt took different forms depending on the currency, but all kept long end yields mostly unchanged or higher in yield. In the case of the U.S. of course, we have the much discussed shifting composition of buyers towards the private side towards price sensitive hands towards levered hands, and that's accompanied by really significant issuance, 2 trillion in net terms, which is relevant for financing, but then in gross terms, 3 trillion or more. And those numbers are all going up in gross terms. They're going up from two and a half to three and a half. And above that in the years ahead. But again, as I said, there's something occurring in similar form in each currency. So in Europe, there's the Dutch pension story. In Japan, of course there's a significant supply demand mismatch in the long end, increasing issuance. So every currency has a question mark around. Fiscal sustainability at a time when there is a shift in composition of the buyers of sovereign debt. And we think the interactions of those are what's driving this global move to higher yields, which is playing out really as we speak. So you put all these together and this is the sort of global yield curve steeper that we're seeing backend yields, belly yields higher, all while the front end is relatively well anchored due to central bank policy normalization. That's how we think about what happened this year, and that's, that's the main factors which will continue to drive rates. Over the next year, and particularly focused on this question mark around fiscally driven increases in supply paired with an unhealthy shift in the supply demand balance for the demand side of sovereign debt.

Brady Leventhal: Thanks, Matt. And now Steve, how are you framing your thought process for trading currencies?

Stephen Jeffries: Yeah, well I think if you go back to where we were only, only a few weeks ago at the Macro conference, I was portraying myself as being, you know, relatively bullishly set up for certainly emerging markets. And generally in, in FX, across carry. I think if you looked at some of the returns certainly from currencies. You know, sort of talking high single digits in, in some are high carry currencies across the globe, whether even if it's G10 or EM Carry had certainly played out in, in the second part of the year as we moved through the more volatile part of 2025 with the tariff, uh, situation. And as we calmed down, as the Fed, were able to ease rates. Then Carrie especially, really blossomed in, in the emerging markets situation, I think. Across EM, fixed income, you know, whether it's the frontier or, or the more broad index you're talking around, you know, high sort of teens returns for the year, which is really a, a definitely a return to, to flavor for these kind of markets. We hadn't seen inflows into EM, local currency for the last, you know, five or six years. And we've started to see funding inflows this year, I think around $10 billion at the time of, of the conference. And I would imagine that that would've ticked up since then. And that compares to around 40, 45 billion that had flowed out in the, in the years, starting from, from the pandemic time. So, you know, really a, a decent backdrop in terms of yield pickup in terms of technical, given where you are in terms of money put to sort of EM markets. So that sort of frames my thoughts there, and broadly I would say that they are similar now, but what we've seen actually, interestingly in, in the last few weeks, and this is not just EM for, not to take Matt's uh, thunder, we should a lot of repricing of front ends. And, and from an EM point of view, that's, that's Korea, that's Columbia. India cut last week, but a, bearish reaction. And we're starting to see moves in, in the markets where yields, yields are pushing higher. So I think there is a little bit of time to be cautious, but the outlook for next year where policy will remain easy. Maybe not easy, but still relatively easy across the globe. And growth supportive. You know, I think that, that, that will lend itself to, to, to being good for, for Carrie and N Em in 2026.

Brady Leventhal: Well, thank you guys. You know, actually this sort of ties into to my next question. So, you know, the Global NACO Conference brought together hundreds of investors. Did you get a sense of investors' moods, or did anything surprise you during your conversations with clients? Um, and I'm actually happy to throw one out there and it, it sort of ties in with both what, uh, Steve and Matt have already talked about. So, you know, I was actually surprised given how many unknowns that we have out there. So Fed chair, IEPA rolling Cook case, et cetera. You know, we're still waiting for the meat of the tier one data from the shutdown. The clients I've spoken to were relatively constructive risk and as such, um, you know, Steve, to your point where. Positioned in a long carry and low-vol portfolio. And then on the other side of that, I did speak to a smaller subset of clients that did feel that there is material risk that the Fed may not be easing further in 2026. And that fed terminal will ultimately need to be repriced higher. This is in conjunction with another takeaway from the conference that the administration is likely going to have to take on the cost of living as a major political issue. And we've already started to see some headlines coming from that. So just interesting to see if your conversations echoed that or you, you heard some other, other interesting tidbits.

Matt Lyons: Sure, I'll happy to take that first. You summarized it well just now. There's a great deal of complacency around carry, particularly in focus and asset swaps in fixed income as part of the rates focus. And then also I found there to be a disconnect between aggregate positioning and discussions around policy rates. Meaning, The probability that global central banks were going to be able to cut significantly further relative to forward rates. Most were skeptical, but that wasn't reflected in their position. I'll be more specific. In the case of dollars, I think most were in agreement with our narrative that the market's pricing down to and below 3% was inconsistent with the data backdrop, inconsistent with the inflation backdrop, and yet most retained steepeners. Similarly on asset swap. People thought that, uh, the global carry backdrop was a bit overextended and yet many retained acid swap longs in the belly and front end across multiple currencies. So that is an overall theme. I felt that there was some disconnect between, uh, shifts in the underlying macro backdrop as it relates to carry shifts in the underlying macro backdrop as it relates to duration in the belly, um, relative to aggregate positioning, which remains quite long and it's steep airs.

Stephen Jeffries: Yeah, I mean, I think generally people, you know, see this time of year looking for the year ahead trade. And generally what, what works next year is what, what's happened in the current year. And as I laid out, being in frontier, EM being a local currency, EM, or higher carry in, in the G10 FX space has, has worked. People were looking for continued opportunities of that. You know, I think that anyone with an EM background always should have a, a certain amount of, you know, cynicism around the market and, and always question, you know, what exactly is, is going on, what can go wrong? As I mentioned, you know, positioning is certainly in an okay spot. It, it may be concentrated in some of the specialist hands. But I think that a broader amount of crossover money that could come into EM is still able to, to move and can move into the new year. To echo Matthew's points around, around Fed policy, I think, you know, that's the one thing that that that concerned me. I think at the time of the conference we were still. Skeptical on, on December, uh, fed cut. Obviously that has been what, who knows, that that should be clarified in the next few days. Uh, and has been a, a turnaround. But where we go forward I think is, is, is the big question. If, if the Fed can't cut to what's delivered, what's priced then, then I think that's going to take some digestion from the market.

Brady Leventhal: Yes, agreed. That was one point that we did bring up in the conference was sort of, obviously we had, uh, the deck fed, and then the sort of the and-beyond, and it's the and-beyond that, I think is, uh. It's the big question mark for 2026. So, alright, so one question that we didn't get to on the panel was, uh, actually our, our, the final question I had, which was our lightning round. So risk versus reward. So what risks are you worried about that aren't so obvious, and what opportunities do you see for 2026? And remember, this was, uh, supposed to be a lightning round, so you can keep your answers brief. So Steve, do you wanna kick us off?

Stephen Jeffries: Look, I think the credit markets are very interesting. The amount of supply that's going to come out of the ai boom. How that feeds into the, the other existing markets like, sort of broad DM credit and then into EM. I think that, you know, can, can the market take down that, that amount of issuance for, for the investment that's needed? That, that's a big question mark.

Brady Leventhal: Thank you. You still see then Carrie and, uh, and select EMS for is, uh, where you want to be for 2026?

Stephen Jeffries: Uh, look, I do, I think the fundamentals in EM remain extremely robust. You've had, you know, a good number of elections in, in 2025 in LATAM that have. Trended towards the right, you know, the right wing and more market friendly. Obviously we have big one in Brazil in a year's time, which, you know, sparked a, a little bit of volatility on, on just on Friday. And then, you know, looking at the, the fiscal position of a lot of these EMS is dramatically different from the G 10 space.

Brady Leventhal: Fair enough. Alright, Matt, uh, your risk versus reward?

Matt Lyons: Yeah, I mean, all of our comments at the macro conference focused on asset swaps and belly valuations, specifically the asset swaps were too rich, collateral, too rich and belly valuations both too rich. And that reflects the entirety of this conversation around the changing supply demand backdrop, together with the economic backdrop, together with the positioning backdrop and valuations as an overlay. And all of that, to me point to asset swaps, uh, in a vulnerable place. And then the landing zone of policy rates and red screens, blues, five-year rate, all of that also in a vulnerable place.

Brady Leventhal: Perfect. Well, that's a wrap. Thank you so much Matt and Steve again for your time and answers today. Thank you to our listeners for tuning into another episode of Making Sense. If you liked this conversation, don't miss our Global Research Outlook podcast, where our research analysts discuss what lies ahead for markets and the economy in 2026. 

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