Fixed Income Update 26 Feb 2026
KBVS WEEKLY FIXED INCOME UPDATE
Thursday, 26 February 2026
Bond Markets at a Crossroads Amid Disinflation Hopes and Fiscal Concerns
U.S. economic growth is moderating, with GDP expanding at 1.4% while annual inflation has eased to 2.4%. In principle, such a macroeconomic backdrop—slowing growth combined with softer headline inflation—tends to be constructive for fixed income markets. However, the latest Core PCE Price Index rose by 0.40% MoM, exceeding expectations and signaling that underlying inflationary pressures remain persistent. This upside surprise has tempered expectations for an imminent policy pivot.
Additional uncertainty stems from potential tariff policies under former President Trump, which could reintroduce supply-side pressures and complicate the inflation outlook. Reflecting these dynamics, markets are currently pricing in a 98% probability that the Federal Reserve will keep interest rates unchanged at the Mar ‘26 meeting, indicating a near-term pause despite the broader growth deceleration. This suggests that while the medium-term trajectory may still lean toward easing, policymakers are likely to remain cautious until clearer evidence of sustained disinflation emerges.
At the same time, rising fiscal deficits present a key domestic risk. A widening deficit could put upward pressure on government bond supply, potentially limiting the extent of yield declines even in a slowing growth environment. Furthermore, a deteriorating current account position warrants closer monitoring, as it may increase external vulnerabilities and heighten sensitivity to global capital flow shifts.
Taken together, while the macro backdrop initially appears supportive for bonds, persistent core inflation, policy uncertainty, and structural imbalances introduce constraints that could delay or moderate the magnitude of monetary easing.
Regards,
Fikri C Permana - KBVS Research Team