Euro yield curve evolution and real long-term rates

Euro yield curve evolution and real long-term rates

Fecha: marzo 2023

Ignacio Ezquiaga and José Manuel Amor

Yield curve

SEFO, Spanish and International Economic & Financial Outlook, V. 12 N.º 2 (March 2023)

Long-term interest rates are a function of three major factors: real interest rates, the structure of supply and demand, taking into consideration the central bank’s balance sheet, and long-term inflation expectations. Thus, based on the information provided by the nominal yield curves (spot and forward rates), inflation expectations, gleaned from the market and surveys, and estimated real rates, we assess the new interest rate levels etched out in the eurozone. Our results show that there is a possibility that following the significant upward shift in short-term rates observed since the summer of 2021, long-term rates may have stabilised in real terms such that, going forward, the curve will pivot around them. Under this scenario, as short-term rates keep increasing, the stabilisation of longerterm rates could generate a downward sloping yield curve.

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