Weekly Update - In 2026, it will be the governments that will shape the interest rates

2025, a paradoxical year for interest rates.
The European Central Bank (ECB) continued normalizing its monetary policy amid confirmed disinflation. Its key interest rate fell from 4% in mid-2024 to 2% in recent months. Yet paradoxically, this 200 basis point cut in short-term rates has not translated into lower long-term rates. The latter remained high: around 2.7% for Germany and 3.4% for France, well above pre-Covid levels. Why this resistance? Several factors: stronger nominal growth, increased bond supply linked to rising public debt, and weaker demand due to the gradual withdrawal of central banks (Quantitative Tightening). Additionally, the international context features generally high rates, limiting room for cuts in the eurozone.

2026, budget plans will maintain pressure on long-term rates.
The new year will be marked by the rise of fiscal support plans. In the United States, tax cuts promised by Donald Trump are expected to come into effect. In Japan, the new Prime Minister Sanae Takaichi announced a massive support plan. In Europe, the "budgetary bazooka" of the new German Chancellor is also expected to be deployed. These massive support plans will increase public financing needs and thus sovereign bond supply, fueling pressure on rates. Meanwhile, the ECB will continue reducing its balance sheet. Added to this is the risk of renewed tension on French long-term rates amid persistent political instability and heightened scrutiny of European budgetary rules
At the same time, barring a major shock, the ECB should keep its key rate around 2%, considering its policy "well positioned" in a stabilized inflation environment and more resilient growth supported by fiscal measures. The yield curve could therefore steepen further: short-term rates held steady by the ECB, long-term rates under pressure.

Advice for investors: be active in investment decisions.
In this context, passivity is no longer an option. Indeed, short-term or short-duration products (savings accounts, money market funds, short-term bonds) offer secure but unattractive returns. In the bond market, caution is warranted: probable tensions on long-term rates would mechanically lead to valuation declines. However, carry strategies can take advantage of the high rate level while limiting volatility risk.
High long-term rates also favor structured products, with more generous coupons and easier capital guarantees. Finally, equity markets should benefit from fiscal support and stronger growth, notably in infrastructure, energy, and defense sectors, though volatility will remain.
In conclusion, this context of yield curve steepening should encourage investors, more than usual, to take control of their choices.

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