November 25, 2025
Debt Concerns Weigh on Bond Markets
Developments of the year and a well-founded outlook: Read our experts’ analyses and forecasts on interest rates here.
The 2026 Annual Outlook – Interest Rates
- Elmar Völker · Strategy / Macro Research
A mix of trade policy worries and hopes for fiscal stimulus – particularly from Germany – currently shape the economic outlook for the euro area. Meanwhile, inflation appears to be stabilizing close to the ECB's 2% target. Monetary policy in the euro area is currently predicated on a broadly stable economic outlook with moderate risks to price stability. Against this backdrop, there is little reason for policymakers to move the deposit rate away from its current 2% anytime soon in either direction. Recently, the ECB Governing Council set a high bar for resuming the rate-cutting path it paused in July 2025. At the same time, a rate hike in 2026 would likely require a sharp and unexpected increase in inflation risks. As such, we expect the ECB to leave its key short-term rates unchanged throughout 2026 as the most likely scenario.
At the same time, the trend toward rising government debt in all major economic regions will likely lead to long-term yields inching higher. According to our forecast, Germany will need to issue a record volume of Bunds in 2026 to finance the government’s spending plans. Investors are expected to demand higher risk premiums for long-dated government bonds, pushing the yield on 10-year Bunds to around 3% in the second half of 2026.
In the U.S., concerns about long-term government debt are even more pronounced. Additionally, doubts about the independence of U.S. monetary policy is growing. These factors may drive investors to demand elevated risk premiums. Therefore, U.S. long-term yields are bound to rise, even as the Fed cautiously lowers its key policy rate in response to a weakening U.S. labor market and slowing economic growth. Overall, we anticipate two further rate cuts of 25 basis points each by the Fed by the end of 2026.
We expect the ECB to hold rates in 2026, but bund yields will rise
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Key questions from clients answered by our experts
Is the Fed losing its independence?
No, but the Fed will permanently be under greater political pressure than it was before Trump. That means walking a fine line. U.S. central bankers will have to navigate between constant interference from the White House and the wary eyes of investors who fear an erosion of independence. In the public perception of the Fed, Jerome Powell's successor will play a pivotal role.
Are long-term U.S. government bonds attractive?
We prefer government bonds with short- to medium- term maturities. While long-term U.S. bonds now offer slightly higher yields than short-term bonds, the yield advantage is significantly smaller than the long-term historical average. This does not sufficiently compensate for the risk posed by rapidly growing U.S. national debt.
Will the ECB’s next interest rate move be up or down?
If our forecast is correct that the ECB will hold steady in 2026, the next move is likely to be an increase. While inflation risks in the euro area are lower in the short term due to economic weakness, in the medium term, the debt-financed policies of the German government are likely to drive inflation higher again.
Elmar Völker · Strategy / Macro Research
The 2026 Annual Outlook – eight topics in focus
The 2026 annual outlook – PDF download
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3.3 MB | 25.11.2025
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