Eurozone interest rates are rising, the ultra-long end of the German curve is steepening

Euro area government bond yields rose slightly on Monday as investors looked towards US government bonds, while the ultra-long end of the German curve hovered near its steepest level in more than six years. Investors were awaiting euro area inflation data due on Tuesday, even as figures from individual countries were published last week that reinforced economists’ expectations that no further interest rate cuts from the European Central Bank are likely in the near term.The German ten-year yield, the benchmark for the eurozone, rose by 1.5 basis points (bps) to 2.70%.

The yield gap between the 30-year and 10-year yields on German government bonds stood at 64.11 basis points, after reaching 64.40 basis points at the end of November, the highest level since May 2019. Germany’s parliament on Friday passed the 2026 budget with more than 180 billion euros in new debt, outlining how Berlin will use its financial firepower to revive its bloodless economy. The benchmark 10-year U.S. Treasury yield rose 2.5 basis points to 4.04%, after rising on Friday on low volumes following the U.S. Thanksgiving holiday.
The yield spread between the US and German 10-year borrowing costs stood at 133.50 basis points, after reaching 131.96 basis points last week, the lowest level since April 7.

US borrowing costs continue to lead the charge, while volatility in the Eurozone is expected to remain subdued as the ECB will maintain interest rates well into 2027.

The German two-year yield, more sensitive to expectations regarding the ECB’s policy rate outlook, rose by one basis point to 2.04%. In mid-November, interest rates reached 2.051%, the highest level since March 28.

The yield gap between Italian and German bonds – a market indicator of the extra interest investors need to hold Italian bonds instead of safe Bunds – hit a new 15-year low at 68.80 basis points.