Chart of the week: will it last?

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The historically narrow trading range of the 10-year Bund yield since the sharp rise observed in 2022 masks underlying pressures challenging this apparent calm. Recent yield stability reflects a delicate balance between competing economic forces.

On the supportive side, effectively anchored inflation expectations and persistently weak Eurozone growth fundamentals have enabled the European Central Bank (ECB) to initiate rate cuts, underpinning stability in shorter maturities. However, these accommodative measures increasingly clash with structural pressures at longer maturities. Rising public debt remains an ongoing concern, exacerbated by central banks’ reduced bond-buying activity, contributing to a weakening supply-demand dynamic.

Adding complexity, recent structural fiscal commitments—particularly in defence, a sector inherently less economically productive—coincide with increased susceptibility to inflationary shocks. Ongoing trade disputes and geopolitical tensions raise persistent fears of supply disruptions, potentially complicating the ECB’s efforts to maintain inflation near its target.

Consequently, the current tight yield ranges may prove temporary. Short-term yields indeed benefit from cyclical, growth-supportive monetary policies, yet longer-term yields remain vulnerable to quantitative tightening, fiscal expansion, and a possible reversal of globalisation’s deflationary effects. Thus, the present equilibrium conceals latent tensions that are likely to prompt adjustments to these unusually compressed trading ranges.