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05.20.2026

Long EA rates: A quant approach

Two new models to enrich the quantitative framework for EA rates



In this note, we introduce two new models that enrich our quantitative framework for EA rates.

The first is an asset-price decomposition model that breaks down movements in EA rates into macroeconomic drivers, central bank policy stance, and the broader risk environment, while distinguishing between domestic factors and those imported from the US.

The second is a term premium model that disentangles ECB policy expectations from risk compensation and provides an estimate of the Bund term premium comparable to the Adrian, Crump & Moench (ACM) term premium estimate for the US.
Both models suggest that, since the onset of the Middle East conflict:

1. The repricing of monetary policy expectations in both the EA and the US - across both the short and long ends of the curve - has been the primary driver of the rise in EA rates.
2. More than 60% of the increase in EA rates can be attributed to tighter financial conditions imported from the US, through both macroeconomic channels and central bank expectations.

Against this backdrop, we continue to believe that EA rates are close to their peak levels, and we remain tactically LONG on Bunds and BTPs for the following reasons:

1. If the conflict de-escalates over the coming weeks and the Strait of Hormuz reopens, we would expect the contribution of hawkish monetary policy expectations — from both the Fed and the ECB — to decline materially.
2. If the conflict persists and the Strait of Hormuz remains closed, we would expect the positive contribution of EA macro factors to rates to diminish significantly, while downside risks to growth would likely lead the ECB to    adopt a more dovish stance, thereby reducing the contribution from tighter monetary policy expectations.

The main risk to our view is 1) that the Middle East conflict continues and EA countries significantly scale up the size of their fiscal easing, 2) hat the US economy fares too well, as that would lead to even more hawkish monetary policy expectations and a higher term premium.


Chiara Cremonesi 
Senior Rates Strategist
Investment Research​


Matteo Gallone 
Junior Macroeconomist
Investment Research 



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