The European Central Bank’s shift toward a more hawkish policy stance since March has primarily lifted real rate expectations rather than increasing sovereign debt term premia, UBS said in a client note on Wednesday.
Money-market pricing reflects 28 basis points of ECB rate hikes by 2027, a move UBS attributes to investors’ growing conviction that the central bank will maintain restrictive policy for longer. Mustafa Oguz Caylan, UBS strategist, noted that the recent rise in long-term bond yields is often interpreted as compensation for holding sovereign debt over extended horizons, but he questioned whether this fully explains the shift.
UBS highlighted that the euro area has shown little evidence of a meaningful increase in the real term premium embedded in 10-year Bund yields. Instead, the upward pressure on yields has been driven by higher long-term expectations for where real short-term rates will trade over the coming decade. The firm added that growth resilience in the euro area supports its view that tightening expectations for 2027 remain intact.
The strategist also pointed out that the ECB’s hawkish rhetoric has offset some of the upward pressure on euro-area term premia originating from U.S. dynamics. UBS sees value in flattening yield curves if oil prices stabilize, though it has not yet adjusted its outlook to fade expectations of further tightening.
