12.12.2025
Stiff steepening
Government bond curves continue to steepening in 2026
Curve steepening across DMs has been one of the most popular trades this year.
Our analysis shows that 1) monetary policy easing and 2) increasing free-float were the most powerful drivers behind the move. Institutional changes (e.g. the Dutch pension reform) and changes in the investor base post-Covid also contributed via lower demand for the long end.
As our macro baseline anticipates a continuation of these forces, we expect government bond curves to continue steepening in 2026.
That said, we expect a less aggressive steepening than in 2025, as we expect debt management agencies in developed countries to adapt to lower demand for government bonds at the long and extra-long maturities and reduce the average maturity of bond issuance.
We expect the steepening in 2026 to be concentrated mostly on the 2/10Y bucket of the curves, rather than at the extra-long end of the curve. Based on the level of the 2/10Y spreads across developed countries, 10/30Y spreads are already too steep. Moreover, except for the US, all the other countries have lengthened the average maturity of their debts in recent years, creating extra room for flexibility in reducing the average maturity of issuance going forward, a factor that will ease pressure at the extra-long end of the curve.
Risks are to the upside. As the outlook is particularly fluid in the US amid risks that the administration may deliver electoral fiscal easing, the Supreme Court may rule against IEEPA tariffs, and the Fed’s credibility remains under severe market scrutiny, there is a risk that the steepening next year could be as aggressive as that which unfolded in 2025. Given the systemic importance of the US market, in any of those risk scenarios, we would expect the EA and the UK markets and, to a lesser extent, the Japanese market, to follow through.
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