European fixed income outlook—cautious optimism

European fixed income enters 2026 on firmer footing, with ECB easing now feeding through to stronger growth and inflation close to target. A German-led fiscal push is emerging as a key driver, lifting domestic activity and supporting the broader eurozone, even as political gridlock in France and lingering geopolitical risks temper the outlook. Former “peripheral” markets such as Spain are now relative bright spots, helped by improved public finances and resilient demand.

Against this backdrop, yield curves are expected to steepen from the intermediate to long end, reflecting heavier sovereign issuance—especially from Germany—and waning structural demand for long-duration assets. Credit should benefit from moderate growth but tight spreads argue for caution and selectivity rather than broad risk-taking. A modestly stronger euro and targeted opportunities in Nordic and Central European currencies round out a cautiously optimistic stance that favours intermediate maturities while keeping dry powder for valuation-driven entry points.