Europe | What drives the German Bund Term-Premium?

Summary

The German Bund 10Y term premium turned positive in the aftermath of the pandemic, boosted by the upward trend in the uncertainty surrounding inflation as well as spillover effects from a higher US term-premium. Furthermore, Euro Area growth uncertainty and moderation in ECB bond purchases also contributed to the upside.

Key points

• Key points:
• As the term premium reflects uncertainty around several economic variables, we identified the drivers of term premium based on uncertainties surrounding inflation, growth, Euro Area fiscal stress and global factors.
• We present a multiple linear regression analysis that identifies the factors behind the evolution of the Bund term premium, with a focus on its recent shifts and in particular the increase in inflation expectations, uncertainty regarding long-term growth and the spillover effects of higher US term premium. Also visible are the early effects of the gradual ECB balance sheet normalization process.
• Going forward, we expect the evolution of the German 10Y term premium to be driven by the ongoing disinflationary process, which would be partly offset by a pick-up in Euro Area fiscal stress in the wake of the normalization of ECB’s unconventional policy support. Nonetheless any such fiscal stress will remain contained due to the effect of ECB’s Transmission Protection Instrument (TPI).

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