ING analysts Padhraic Garvey and Michiel Tukker highlight that Eurozone real yields have been increasingly influenced by structural factors such as fiscal expansion and record levels of bond supply. They note that 10-year euro implied real rates have risen significantly since 2024, with German government spending plans contributing to this upward movement [1]. The analysts emphasize that while inflation remains the main driver of euro rates, the underlying dynamics of real rates are equally important for long-term market analysis.
The report explains that improved growth expectations in the Eurozone, partly due to fiscal stimulus, have helped lift real rates and reduce the risk of secular stagnation. In contrast, the US has seen its real rates rise more sharply, driven by narratives around artificial intelligence and economic growth. Over the past few months, 10-year euro real rates have traded sideways, while US real rates have increased significantly [1].
A key factor identified is the record bond supply entering the market, which is exerting upward pressure on longer-dated real rates. The European Central Bank's ongoing reduction of its bond portfolio means investors must absorb more interest rate risk, leading to a higher term premium. Additionally, the large US fiscal deficit is contributing to a steeper global yield curve by increasing global bond supply [1].
Despite these upward pressures, the analysts caution that a shift in market sentiment due to growth concerns or rising recession risks could quickly reverse the current trend in real yields. Both the US and Eurozone economies have vulnerabilities, and any increase in recession fears could lead to a decline in real rates [1].
CONCLUSION
Eurozone real yields have been rising due to fiscal expansion and record bond supply, but ING analysts warn that this trend could reverse if growth concerns intensify. Investors should monitor both structural factors and potential shifts in economic sentiment for future market direction.