Weekly update - Why long-term rates are rising (and why it could last)

The summer was marked by a further rise in interest rates, taking the 10-year bond to over 4.6% for the United States, 4.1% for France and 2.8% for Japan. This rise is not the result of a single factor, but of a combination of dynamics that feed into each other: growth that is holding up better than expected, a risk of inflation that is taking hold, and a growing imbalance between supply and demand for bonds.

Growth is still holding firmly. The first driver is the resilience of activity. Despite a still uncertain geopolitical context and recurring tensions on energy, developed economies held up better than expected in the second quarter, with annualised growth of 1.5% in the United States and 1.3% in the euro area. The business surveys available at this stage suggest that this pace could accelerate further in the third quarter. An economy that does not slow down is one that has little reason to see its key rates fall quickly – this is the first thread that links growth and long-term rates.

Particularly strong financial markets. Alongside the good performance of growth, Spanish financial markets are also recording very strong performances. The IBEX 35 is the most dynamic stock market index among developed markets, with a rise of 123% since 2022. This increase notably reflects a sector composition highly exposed to banks and utilities. Bond markets show a comparable trajectory, with a significant compression of sovereign risk premiums since 2022.

Scars from the crisis of the 2010s that have not fully healed. The strong dynamism of the Spanish economy over recent years has nevertheless not erased all the consequences of the bursting of the real estate bubble of the 2010s. Indeed, although it has fallen significantly from its peak in 2013, the unemployment rate remains high at 11%, a level significantly above that observed in the euro area. Moreover, this unemployment remains particularly concentrated among those under the age of 25.

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