UBS told clients in a note Wednesday that the recent climb in long-term bond yields reflects a reassessment of where central bank policy rates are heading rather than investors demanding more compensation to hold sovereign debt, with the euro area offering the clearest example. Strategist Mustafa Oguz Caylan wrote that the euro area has seen little evidence of a meaningful increase in the real term premium embedded in 10-year Bund yields, and instead the rise has been driven primarily by higher long-term expectations of where real short-term rates will trade over the decade ahead. UBS pointed to its DeepSpeak sentiment tool, which shows the largest shift among ECB policymakers since March has been on interest rates and inflation, and Caylan said this hawkish shift in rhetoric has played a key role in lifting real rate expectations while offsetting some upward pressure on euro-area term premia spilling over from the US. On positioning, UBS said it is not yet fading expectations of 2027 ECB tightening, given growth has held up, and would not lean against money-market pricing of 28 basis points of hikes, seeing value in flattening structures if oil prices stabilize.
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