ING’s Padhraic Garvey and Michiel Tukker stress that Eurozone real rates are increasingly driven by structural forces such as fiscal expansion and record bond supply. They point to rising 10Y euro implied real rates since 2024, helped by German spending plans. They warn that growth worries or recession risks could quickly reverse the current upward pressure on Eurozone real yields.

Euro real rates lifted by structure

“Inflation is clearly the current driving force behind euro rates, but the dynamics behind real rates should also not be forgotten when looking over a longer horizon. When we look at the 10Y euro implied real rate, we are close to the starting point from before the rise in oil prices. But when we take a longer view, we see that 10Y real rates have risen significantly since 2024.”

“Part of the real rate story can be explained by improving growth expectations in the eurozone, whereby a fiscal boost can help reduce the chance of returning to secular stagnation. In the US, the AI story seems to be feeding a growth narrative most recently. Whilst 10Y euro real rates traded sideways over the past few months, US real rates actually rose significantly.”

“But the big elephant in the room is the record bond supply hitting markets, which can also have an upward impact on longer-dated real rates. With the ECB continuing to reduce their bond portfolio, investors have increasingly more interest rate risk to absorb, increasing the term premium. And in the US, a worrisome large fiscal deficit is also adding to the global bond supply, keeping curves steeper.”

“Whilst oil prices dominate daily moves, in the background we could see a continuation of upward pressure on global real rates. This could change, however, if growth worries start mounting. Both the US and eurozone economies have their weaknesses and any talk about recession risks would quickly turn the direction of real rates.”

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