The steepening of yield curves has become a key trend in global fixed-income markets. Over the past six months, the yield curve has steepened without significant changes in short-term interest rates, a phenomenon we dubbed structural steepening. Our analysis highlights that term premia, which measure the additional return investors demand for holding long-term bonds, are rising due to several structural shifts. These include higher inflation and inflation expectations, a rise in the neutral interest rate (r*) and the transition from quantitative easing (QE) to quantitative tightening (QT). However, the Euro market lags behind the US and UK in this trend, as the European Central Bank (ECB) adopts a slower, less proactive QT approach compared to, say, the Bank of England.
Despite other central banks likely to keep cutting rates, the ECB is close to the end of its current cutting cycle, whilst the term premium, particularly in the Euro market, has further room to rise, based on factors such as higher debt-to-GDP ratios, ongoing inflation risks and years of QT to come. Therefore, we think the risk of chasing long-term yields remains high and specifically ultra-long end bond yields remain at risk of further increases.
