Disinflation Intensifies in the euro area: how long can german bond yields stay high?
14 JAN, 2026
By Mauro Valle from Generali Investments
By Mauro Valle, Head of Fixed Income, Generali Investments
US nonfarm payrolls were released broadly in line with expectations, with the unemployment rate declining to 4.4%. As a result, markets postponed expectations for the first Federal Reserve rate cut to June–July, and we confirm our neutral stance on US interest rates.
The euro area economic outlook remains positive. Inflation fell to 2.0%, while core inflation eased to 2.3%. We continue to believe that German government bond yields, currently around 2.9%, are trading at the upper end of their range.
Portfolios maintain a relatively long duration. Exposure to Germany is underweight, offset by a long position in EU bonds. Exposure to Spain and Greece remains positive.
US interest rates
The solid outlook for the US economy – supported by forthcoming fiscal stimulus, deregulation, and a labor market that is not weakening significantly – has led markets to rule out a rate cut at the January Fed meeting. Instead, the first cut is now expected in June–July, followed by a second move in December.
The upcoming US CPI release is expected to come in at 2.7%, unchanged from the previous month, although the data may be distorted by limited information availability following the government shutdown.
Alongside CPI, markets will closely monitor retail sales and November housing indicators, which could provide further insight into consumer resilience and housing market trends. Recent decisions by the Trump administration to instruct Fannie Mae and Freddie Mac to purchase mortgage-backed securities, along with the decision to cap credit card interest rates, signal a clear intention to keep long-term interest rates under control, particularly for consumers. Whether these measures will achieve the intended effect remains to be seen.
We reaffirm our neutral stance on US interest rates, which may continue to fluctuate within the range seen in recent weeks.
Euro area interest rates and the bund
German Bund yields are trading within the 2.8%–2.9% range, while break-even inflation rates rose by 4 basis points to 1.78%. German industrial orders and industrial production posted strong gains in November, suggesting resilience in the manufacturing sector. However, IFO business expectations have recently stabilized, pointing to some caution about the outlook.
Euro area inflation moderated in December, falling to 2.0%, with core inflation at 2.3%. In the first months of the year, inflation data are expected to continue moderating and move clearly below 2%, driven by methodological and base effects. Despite this disinflationary trend, the ECB is expected to firmly keep policy rates unchanged.
We confirm our view that German bond yields at around 2.9% – supported by real rates above 1% – are positioned at the upper end of the range, given the low inflation environment and economic outlook.
In France, reports suggest that Prime Minister Lecornu is considering early parliamentary elections to be held alongside the municipal elections in March, although the final decision rests with President Macron. At the start of the week, French OATs were trading 4 basis points above Italian BTPs.
Italian bonds have started the year strongly, with the spread at 63 basis points, supported by robust demand in the latest syndicated issuance (a €15 billion new 7-year bond and a €5 billion tap of the 2046 green bond).
Portfolio positioning
Portfolios remain overweight in relative duration, as German bond yields continue to hover around 2.9%. Exposure to Germany is underweight, offset by a long position in EU bonds.
We maintain a long position in Italian bonds, combined with a significant underweight in French OATs. Exposure to Spanish and Greek bonds remains positive.
Along the yield curve, portfolios hold a long position in the 5–10 year segment, while maintaining a neutral stance on 30-year maturities.
