We see the asset cycle moving from the “good-times” phase of 2025 into a more leveraged but still resilient stage in 2026. Credit continues to flow, and liquidity stays supportive. Rising leverage is creating more sensitivity, but not fragility, largely because private credit has become the marginal provider of capital. With no signs of a credit crunch and funding still accessible, the system retains meaningful runway before reaching anything resembling end-of-cycle dynamics.
Real rates "lower, not low". Fed policy rates will converge to neutral (3.00–3.50%) with a focus on real, not nominal, rates. As European rates stabilise and the BoJ retains a hiking bias to normalize Japan, the net result is DM rate convergence, steeper curves, and a stable-to-softer USD.
The US fiscal reckoning is the sleeper risk. With deficits near 6% and the "One Big Beautiful Bill Act" adding to the debt load, the fiscal arithmetic is becoming hard to ignore. This will likely keep the term premium and long-end yields elevated despite cooling inflation.
Liquidity is the new focus for central banks. With the end of QT, the focus shifts to maintaining ample bank reserves ("liquidity neutral") to support private sector re-leveraging. However, term premiums remain the main driver, keeping long-end yields elevated.
Base case: no recession & sticky inflation but under control as the worst is over. Global growth slows but remains positive; the US skirts recession via softer consumption, while the European cycle reaccelerates in 2026 amid a strong fiscal awakening led by Germany. Emerging markets re-accelerate modestly as the inflation shock fades.