ECB blog dissects euro area yield curve steepening in 2025

In 2025, euro area risk-free interest rates at the short end (up to two years) remained largely unchanged.

However, rates rose significantly at the long (ten-year) and very long (30-year) ends of the curve.

The ten-year risk-free rate increased by over 40 basis points, while its 30-year counterpart rose by approximately 90 basis points.

This resulted in a steeper euro area risk-free curve across both the two- to ten-year and ten- to 30-year segments.

The blog post highlights that this steepening primarily reflects changes in the real component of interest rates, as investors' inflation expectations remained broadly stable.

The steepening was unusually pronounced at the very long end, marking one of the largest calendar-year changes since the euro's introduction.

Despite these dynamics, the curve's current shape is not abnormal, having reversed a historically rare inversion and aligning closer to its long-term average.

The blog post identifies several drivers behind the pronounced yield curve steepening.

These include Germany's significant fiscal expansion announcement in early 2025, potentially raising yields via increased bond supply and higher growth expectations.

Rising global public debt sustainability concerns and waning demand for long-term sovereign bonds also contributed.

The analysis highlights an unusually strong global component, especially at the very long end, indicating common drivers across major economies.

However, euro area-specific circumstances were also relevant.

Sovereign curves did not steepen uniformly; Germany and France experienced more pronounced steepening than Italy or Spain.

These country-specific borrowing cost changes aligned with their respective debt outlooks, demonstrating that global factors, while significant, are only part of the explanation.