Eurozone real rates are being shaped by structural factors alongside inflation, with fiscal expansion and record bond supply exerting upward pressure on longer maturities. ING says the 10-year euro implied real rate is near its pre-oil-price-shock starting point, yet it has risen since 2024, a move linked in part to improving eurozone growth expectations and German spending plans aimed at reducing the risk of secular stagnation.
Over recent months, ING says 10-year euro real rates have traded sideways while US real rates rose, with the divergence set against heavy global issuance. ECB balance-sheet reduction is increasing the amount of interest-rate risk the market must absorb, lifting the term premium, while a large US fiscal deficit is adding to supply and keeping yield curves steeper. Oil prices are described as dominating day-to-day moves, but ING flags that any renewed growth worries or recession talk in the US or eurozone could swiftly reverse the direction of real rates.
Structural Forces and Changing Trading Environments
We see structural forces, not just day-to-day inflation numbers, driving euro rates higher. Massive government bond supply and continued fiscal spending are creating a floor under real yields. This shift suggests a different trading environment compared to past years.
For instance, the German 10-year real yield has recently pushed above 0.50%, a level that signals a real cost of borrowing for governments. This is a stark contrast to the negative real yields that dominated most of the 2010s. This upward pressure is reinforced as the ECB’s balance sheet has now contracted by over €1.5 trillion since its peak, leaving more debt for the market to absorb.
Positioning, Risks, and Market Fragility
We believe derivative positioning should favor moderately higher long-term rates. This could involve paying fixed on 10-year interest rate swaps or buying put options on Bund futures to profit from a further rise in yields. The sheer volume of debt issuance, with Germany’s latest calendar for the second half of 2026 pointing to another €250 billion in new debt, supports a steeper yield curve.
However, we must remain alert to signs of a sharp reversal driven by growth fears. The latest German IFO Business Climate index unexpectedly fell to 92.5, reminding us that the economic recovery is fragile. Any further deterioration in leading indicators could quickly unwind these higher real yields.
This fragility means any long-term bearish bond positions should be paired with a clear exit strategy or protective options. We are positioned for continued upward pressure on real rates but will be watching incoming growth data very closely for an early signal to shift our stance. The current environment demands flexibility to trade both sides of the market.
