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Government bond yields went up in 2026
Year-to-date, 10-year government bond yields in the eurozone and the US rose by 40-50 bps. In the US, three factors were decisive.
- First, rising fiscal deficits, higher US Treasury supply and changed communication under the new Fed chair pushed long-term interest rates higher.
- Second, market expectations that the Fed will keep interest rates higher for longer strengthened after the Iran war began at the end of February.
- Third, strong growth reduced recession fears and safe-haven demand for US Treasuries.
In the eurozone, three similar drivers were at work.
- First, fiscal expansion and higher sovereign issuance lifted term premia, as investors focused more on rising government borrowing needs due to defence and infrastructure spending.
- Second, concerns regarding sticky inflation rose as Iran-war-related energy price rises lifted short-term inflation expectations.
- Third, the ECB turned hawkish, raising its deposit rate by 25 bps in June 2026 and maintained a tightening bias thereafter.
Tight credit spreads leave limited room for excess returns versus government bonds and imply correction risk. Bond issuance is likely to pick up, and larger deals could weigh on market conditions, especially in European credit markets, as the US market appears saturated. We are therefore neutral on IG USD spreads but expect wider spreads in IG EUR and HY. For 2-year and 10-year government bonds in August, we expect lower yields in the US and eurozone but remain neutral on Switzerland.
