Market rates are currently experiencing a period of stability. The 10-year Treasury yield has stabilized around 4.5%.
In the eurozone, the 10-year Euribor rate has hovered near 2.5%, with the 10-year Bund yield remaining relatively similar. If we examine potential declines in these rates, the likelihood of interest rate cuts emerges as a major factor.
For the eurozone, we predict that the European Central Bank (ECB) may lower its rate to around 1.75% from the current 2.0%. With the current 10-year rate only 75 basis points above this forecast, we might see a possible decline of 25 basis points.
If the ECB were to cut further down to 1.5%, we could potentially see 10-year rates slip to the 2-2.25% range. In the US, the Federal Reserve is expected to reduce rates to between 3.25% and 3.5%.
This prediction suggests a downward adjustment of about 115 basis points from the current yield. While there may be room for a 25 basis point decrease, a more significant reduction in yields would require the Fed to cut rates more drastically than currently anticipated.
Conversely, the potential for rising yields appears more substantial. Fiscal conditions in both the US and eurozone are key factors.
A tax-cutting package under consideration in the US may exacerbate fiscal deficits, resulting in increased bond issuance. Meanwhile, anticipated additional spending in the eurozone, particularly from Germany, will also contribute to issuing pressures, especially post-2026.
For the US, the passing of the tax-cut bill, alongside rising inflation, may push the 10-year yield towards 4.75%, possibly extending to 5% before easing towards 4.25% through 2026. In the eurozone, once the ECB halts cuts, increasing fiscal pressures could elevate the 10-year Bund yield to around 2.75% or more.
Overall, the factors driving long-term yields seem bearish, as issuance pressures are expected to dominate the market trends moving forward.