Volatile US interest rate markets expected

Yields will rise in 2026

Following its latest key interest rate cut of 25 basis points (bp) on December 10, the US Federal Reserve is poised to implement further key interest rate cuts and thus a less restrictive monetary policy. Over the next two quarters, key interest rates are likely to move from their current upper limit of 3.75% towards a neutral interest rate level of around 3%, at which the economy is neither stimulated nor slowed down. We expect two further interest rate cuts of 25 bp each this year. The Fed currently considers the risks in the US labor market, where the unemployment rate has reached 4.6%, to be more serious than the risks of inflation. Although the current inflation rate is elevated, a significant portion of the excess is attributable to US tariffs, whose one-off effect should expire from Q2 2026, according to the official opinion of the interest rate-setting committee.

However, we believe that US inflation in 2026 will prove more persistent than Fed officials expect. This may raise questions about possible key interest rate hikes later in the year with a view to 2027. Following personnel and thus political changes, the Fed will be more willing to tolerate lower interest rates for longer – and thus inflation risks. In our view, this could lead to these risks being priced into the government bond market, which should result in rising US yields later in the year. The more upward-biased economic risks in the eurozone, the German economic stimulus package, Europe-wide defense and digitization spending, and Germany's rising volume of new issues will, in our view, also lead to slightly higher German yields over the course of the year.

Given the economic outlook, however, the ECB finds itself in the comfortable position of being able to leave the deposit rate, which is decisive for monetary policy, stable at 2%. The economic outlook for 2026 has improved in recent months, while inflation is already approaching the ECB's price stability target of 2%.

Stablecoins on the financial markets

In this interest rate outlook, we present our expectations for both central banks, the ECB and the US Fed, as well as for the respective government bond markets. In addition, we focus on the capital market and future-oriented topic of stablecoins. This has come into the spotlight due to the significant increase in volume and regulatory offensives. Stablecoins are the first significant link between the financial world and the new blockchain technology. We shed light on the basic functioning of stablecoins and regulatory concepts in the US and the EU, concluding with an analysis of the possible effects on the financial markets.

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