The European Central Bank’s increasingly hawkish rhetoric since March has contributed to a rise in long-term bond yields, driven by higher expectations of real short-term rates rather than an increase in the risk premium demanded by investors, UBS said in a note to clients on Wednesday.
The Swiss bank’s strategist Mustafa Oguz Caylan noted that the euro area’s 10-year Bund yields have climbed without a meaningful increase in the real term premium embedded in sovereign debt. Instead, the move reflects a reassessment of the ECB’s policy trajectory, with investors pricing in a more restrictive stance over the coming decade.
UBS’s analysis, using its DeepSpeak sentiment tool, indicates that the most significant shift among ECB policymakers since March has centered on interest rates and inflation. The resulting hawkish tone has lifted real rate expectations while mitigating some of the upward pressure on euro-area term premia that has spilled over from U.S. markets.
The strategist added that investors have grown more convinced the ECB is prepared to maintain restrictive policy settings for an extended period. UBS is not yet challenging market pricing of 28 basis points of additional hikes, citing resilient economic growth and potential stabilization in oil prices as reasons to retain a cautious outlook.
The bank also sees value in flattening yield curves if energy costs stabilize, suggesting that further policy adjustments could be warranted into 2027.
