UBS Sees Hawkish Shift as Key Driver of Euro-Area Bond Yields

UBS analysts have weighed in on the recent rise in long-term bond yields, suggesting that it reflects a reassessment of central bank policy rates rather than investors demanding more compensation to hold sovereign debt.

In a note issued on Wednesday, UBS strategist Mustafa Oguz Caylan stated that while some interpret the increase in bond yields as evidence that investors are seeking higher returns, this may not be the full story. He pointed out that there has been little evidence of a meaningful increase in the real term premium embedded in euro-area bonds.

Instead, UBS attributes the rise to higher long-term expectations of where real short-term rates will trade over the decade ahead. Caylan noted that the bank's DeepSpeak sentiment tool shows a significant shift among ECB policymakers since March, with a focus on interest rates and inflation.

The analysts believe that this hawkish shift in rhetoric has contributed to the rise in real rate expectations, offsetting some of the upward pressure on euro-area term premia from the US. UBS also stated that it is not yet fading expectations of 2027 ECB tightening, given growth has held up.