Trade deal or not, that is the question

The upward pressure on long-end rates continued throughout July, which, as usual, was characterised by more limited market liquidity than otherwise. Over the past month, 10Y EUR swap rates have increased by nearly 10bp, while the short end has declined slightly again – a socalled 'twist' steepening of the yield curve. This dynamic indicates that the long end of the yield curve is currently less tied to short-term monetary policy expectations in the market than we have seen previously.

Trade policy remains the dominant theme for short-end rates

In the short end of the yield curve for EUR and DKK, uncertainty surrounding trade negotiations with the US continues to dictate the direction. President Trump has set a firm deadline of 1 August to reach an agreement; otherwise, the tariff rate on EU goods will be raised to 30%. The impact of a significant increase in US tariffs is compounded by the likelihood that the EU would feel compelled to respond decisively with tariff increases on US goods and, among other things, digital services. At the moment, the outlook points to a relatively amicable agreement, where EU goods would be subjected to an additional tariff of 10 percentage points (15% in total). However, as we have seen before, the negotiation climate can change quickly.

Continued upward pressure on long-end rates

The long end of the yield curve continues to be influenced by debt concerns, which throughout the year have driven rates higher across regions. The market's focus on debt accumulation in Western economies—also fuelled by Trump’s recently passed 'Big Beautiful Bill'—continues to create uncertainty, as the market will have to absorb a larger supply of bonds as a result. Meanwhile, investors have periodically shown a more subdued appetite for taking on duration risk, with some of the 'natural buyers' at the very long end of the yield curve—pension funds and insurance companies—remaining more cautious than before.

Looking ahead, we continue to see upward risks for the long end of the yield curve, where the adjustment of term premiums will remain a central market theme. In the short term, attention will focus on how the Trump administration balances the issuance of short-term and long-term issuance in its quarterly financing strategy (QRA), which will be announced at the end of July. As we described in the last edition, we see a risk that the market will soon have to absorb a greater amount of duration than it does today. This could again necessitate higher rates in the US, with spillover effects also likely to be felt in the European markets.

ECB is nearing the endpoint, while the Fed resumes easing The ECB meeting in July was, as expected, a relatively uneventful affair with no rate cuts or, for that matter, significant adjustments to the central bank's guidance. The ECB still views monetary policy as being in a 'good place', but the central bank does not rule out the possibility that data may prompt another cut. Much will depend on the ongoing data flow and, not least, the outcome of trade negotiations. We expect one final rate cut in September, but the recent positive developments in trade negotiations and the resilience in growth data have increased the likelihood of a status quo from here.

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