Market sentiment is recovering, and euro rates, in particular, are taking this opportunity to rise higher. At Davos, we saw Trump refraining from escalating the Greenland tensions, further helping to improve sentiment. The 10Y swap rate is back to 2.9%, but still below the earlier high of 2.96%. Meanwhile, the growth outlook in the eurozone is still on an improving trajectory, which together with high supply, helps build the case for higher rates in 2026.
A natural candidate to capture the improved risk sentiment and high issuance is a further steepening of the 5s10s curve this year. The spread between 10Y and 5Y captures the building of a term premium, the additional yield investors demand for holding longer maturities. Both quantitative tightening and increased government issuance should add to this term premium. In Europe, we likely won’t see sharp moves like we’ve seen in Japan this week, but the overall direction should also be for steeper curves.