RATES MONTHLY June 2025 - Long end: a phase or a drama?

In May, the DM bond market faced pressure on long-end yields, exacerbated by Moody’s downgrade of the US credit rating and concerns over legislative approval of the 'Big Beautiful Bill.' Disappointing long-end UST auction results intensified this trend. In the EGBs, Germany’s increased investment plans shifted focus to EUR longs, especially after the Dutch parliament's pension model implicit approval. Recent rallies in JGBs alleviated pressure on EUR yields.  Looking ahead, we adjust our year-end forecast for the 10Y Bund to 2.60%, expecting less swap spread tightening due to non-resident reallocations from US to EUR rates. For the US scenario, the economy exhibits a paradoxical health, as the hypothesis of stagflation gains traction, increasing uncertainty about its prospects. Our economists expect three rate cuts in the last three meetings of the year, with 2Y UST projected to trade around 3.45% by year-end, while the 10Y UST is expected to converge towards 4.50% by December 2026, following a low point of 3.85% in September 2025.