Eurozone’s bund yields and the term premium to remain elevated

We expect 10-year bund yields to increase towards 2.8% by late 2026, as the term premium remains around 1.1% and the risk-neutral yield climbs above 1.7% over the next few quarters. Although national and geopolitical events clearly drove bund yields recently, the structural post-pandemic economic shifts, such as higher interest rates and challenges to the German business model, will remain in place, keeping yields elevated.

German yields were mainly supported by increased bund issuance due to a shift in fiscal policy, while elevated inflation volatility because of tariff uncertainty warranted a higher term premium.

Several factors will cap the pickup in bund yields, mainly as they offer a viable alternative to US Treasuries. Germany’s infrastructure and military spending will boost the economy, making it easier to service additional debt. However, the supply absorbed by private actors will surge as the European Central Bank shrinks its holdings of German bonds.

We consider the 2.6%-3.1% range for the 10-year bund yield as a reliable anchor. The uncertainty around our forecast mainly stems from the terminal ECB rate, which is more likely to under- rather than overshoot our expectations. So, we see risks as skewed toward the lower end of the range.