UBS: Rising Bond Yields Driven by Central Bank Policy Expectations

UBS believes that the recent surge in long-term bond yields is not solely due to investors demanding more compensation for holding sovereign debt. In a note to clients, the bank's strategist Mustafa Oguz Caylan argued that the rise in yields reflects a reassessment of where central bank policy rates are heading.

The euro area is cited as an example, with little evidence of a meaningful increase in the real term premium embedded in long-term bonds. Instead, UBS attributes the rise to higher long-term expectations of real short-term rates over the next decade.

The bank points to its DeepSpeak sentiment tool, which shows that ECB policymakers have shifted their focus towards interest rates and inflation since March. This hawkish shift is seen as a key driver of the increased real rate expectations, with investors becoming more convinced that the ECB will maintain restrictive policy for longer.