The year 2025 saw short-term rates fall while long-term rates rose, ending - by March 2025 - two years of inversion of the euro swap curve.
Over the full year, 10‑year swap rates increased by 50 basis points, while the ECB deposit facility rate declined by 100 basis points, on top of the 100‑basis‑point reduction already implemented in 2024.
Source : Bloomberg et ESTER
With the yield curve now back to a normal shape, can we expect longterm euro swap rates to decline in 2026?
While the question cannot be answered definitively, the main drivers of longterm euro swap rates in 2026 can be summarized as follows:
US Long-Term Rates
Longterm euro rates are consistently influenced by U.S. longterm yields, with a historically strong correlation. A 100 basis point decline in U.S. longterm rates typically leads to a 30 - 60 basis point decline in euro longterm rates due to welldocumented spillover effects. Conversely, higher U.S. yields would exert upward pressure on European longterm rates within similar magnitudes.
Source : Bloomberg et ESTER
Quantitative Tightening (QT)
In the United States, the Federal Reserve has ceased reducing its bond holdings. In contrast, Quantitative Tightening continues in the euro area, where the ECB has progressively halted reinvestments of maturing securities: first under the APP as of July 2023, then fully under the PEPP at the beginning of 2025.
The consolidated balance sheet of the ECB and national central banks has contracted from €8.8 trillion in June 2022 to roughly €6 trillion at the end of 2025, with projections of around €5.7 trillion by the end of 2026. Barring an unlikely policy reversal, no significant support for the euro area bond market should be expected from central banks.
Dutch Pension Funds
The reform of Dutch pension funds implies that these funds are expected to gradually reduce their holdings of ultra‑long‑term government bonds by approximately €100-150 billion between 2026 and 2028, particularly in maturities of 30 years and beyond. This adjustment does not apply only to new contracts but also to existing schemes, which will transition over time.
While the headline figure is significant - amounting to up to 10% of all euro‑area sovereign issuance in 2025 and concentrated in very long‑duration assets - it must be put into perspective: the €100-150 billion refers to cumulative sales over three to four years, and replacement flows will simultaneously be directed toward shorter‑dated assets.
Record Sovereign Supply in 2026
Les émissions combinées des états souverains de la zone euro et de l’Union Européenne elle-même devraient encore progresser en 2026 avec un total de près de 1700 milliards d’euros, en hausse d’environ 200 milliards par rapport à 2025 notamment en raison du programme d’émission de l’Allemagne et de l’union Européenne qui sont en hausse.
Macroeconomic Data
The German fiscal stimulus plan is expected to support growth within the euro area. Forecasts from the European Commission are more optimistic than those from the OECD, but euro‑area GDP growth should remain above 1.2% in 2026, with projections ranging between 1.2% and 1.4%, compared with roughly 1% in 2025.
At the same time, inflation is expected to continue declining, with euro‑area inflation forecast around 1.7% in 2026 versus 2.1% in 2025.
ECB Policy
Although movements in short‑term rates do not necessarily translate directly into long‑term rate adjustments, expectations regarding short‑term policy - now that the curve has normalized - are again more likely to influence long‑term yields.
The ECB has indicated it is comfortable holding rates at the current 2% deposit facility level. The baseline scenario for 2026 is therefore a steady policy stance, with a potential rate cut in the second half of the year if disinflation continues as expected.
Conclusion :
No crystal ball here - but one clear recommendation: As not all conditions are aligned for a broad‑based decline in long‑term euro rates, fixed‑rate borrowers should remain cautious and be ready to seize any temporary downturns in long‑term yields should they occur during the year.
Such opportunities could arise in the event of:
a sharp correction in equity markets,
favourable macroeconomic data, such as inflation stabilizing sustainably around 1.5% in the euro area,
a significant decline in U.S. rates following early achievements by Kevin Warsh, who will succeed Jerome Powell as Chair of the Federal Reserve in May 2026, or
a marked appreciation of the euro against major currencies, which could weigh on European growth and depress inflation expectations.
In 2026, prudence and agility will remain essential.