Is the ECB’s hawkish shift just beginning to bite? UBS weighs in

Investing.com -- UBS told clients in a note Wednesday that the recent climb in long-term bond yields reflects a reassessment of where central bank policy rates are heading rather than investors demanding more compensation to hold sovereign debt, with the euro area offering the clearest example.

"The ongoing rise in long-term bond yields is sometimes interpreted as evidence that investors are asking for greater compensation to hold sovereign debt over a longer horizon. We are not convinced this is the full story," strategist Mustafa Oguz Caylan wrote.

The bank said the euro area has seen little evidence of a meaningful increase in the real term premium embedded in 10-year Bund yields.

Instead, the rise has been driven primarily by higher long-term expectations of where real short-term rates will trade over the decade ahead.

UBS pointed to its DeepSpeak sentiment tool, which shows the largest shift among ECB policymakers since March has been on interest rates and inflation.

“We think this hawkish shift in rhetoric has played a key role in lifting real rate expectations. At the same time, it appears to have offset some of the upward pressure on euro-area term premia spilling over from the US,” wrote Caylan. “Investors have become more convinced that the ECB is willing to keep policy restrictive for longer.”

On positioning, UBS said it is not yet fading expectations of 2027 ECB tightening, given growth has held up, and would not lean against money-market pricing of 28 basis points of hikes. It sees value in flattening structures if oil prices stabilize.

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