Unwinding the consensus in yield curve steepeners
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Article Type
Insights
Topic
Credit
Published
September 22, 2025
Read time
5 mins
Author
Luca Ferramosca, CFA
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The recent deleveraging of the longer end of the yield curve has raised questions about whether the curve steepening trend remains intact or if investors’ conviction has started to wane. Heavy unwinds of long-end steepeners characterized last week’s price action, which saw a global bid to the back-end tenors partially spurred by stretched valuations, a marginally hawkish European Centra Bank (ECB), and a story of Dutch pension funds delaying their transition to a new scheme. There is a case for continued curve steepening going forward. Below is an explanation using the quadrant approach methodology.

 

Fundamentals

  • Monetary Policy:  The bull-steepening twist of the curve may be nearing its endpoint. The ECB has clearly signaled a pause, with policy rates at neutral, inflation forecasts at or around target, and a high bar for any further moves. The €STR 1y1y swap, used as a proxy for the terminal rate though currently subject to the post monetary cycle dynamics, is comfortably positioned just below 2% and has recently begun to reprice higher. With the market now expecting 15% of probability for an additional rate cut by year end and the neutral policy rate effectively reached, this would anecdotally exert less pressure on the fronter end to rally further. ECB Executive Board member Isabel Schnabel’s speech reiterated the hawkish side of the Governing Council, and it’s worth noting that none of the dovish members are advocating for an opposing view.
  • Fiscal Policy:  We see scope for term premia to rise amid expectations of increased free-float in the coming year and an improved growth outlook supported by fiscal easing. The term premia proxy (German Bund 1y1y-5y5y) has retraced from local highs and is trending lower—contrary to the backdrop of increased German issuance (Q4 2025 issuance plan foresees €15bln of additional supply). Defense spending and Germany’s fiscal “bazooka” have led the market to acknowledge that a wave of new issuance is likely in the coming years. The energy transition might continue to play a relevant role in consolidating this trend.

 

Technicals

Flattening moves over the summer have been swiftly countered by investors.

Some Debt Management Offices (DMOs) have attempted to ease pressure on the long end by shortening weighted average maturities, increasing buybacks, or even cancelling planned issuance (e.g., the recent cancellation of UK 30y Gilts), though with limited success. Long-end syndications have generally been well received.

In the very short term, following last week’s European Union (EU) syndication, most of the large supply events (Italian BTP syndication, French OAT long-end auction, EU syndication and German 30yr auction) will be behind us. The remaining significant long-end supply will be the Dutch 30y Dutch Direct Auction on the 23rd. As a reminder, most countries have nearly completed their issuance programs, averaging 80%-85% year-to-date. Hence, seasonal factors will play a less of a role.

 

Valuations

Curves have steepened notably in recent weeks. While some may argue this move is overdone, a longer-term perspective suggests otherwise. The current ~100bps differential between 5s and 30s in Germany remains well below levels observed in previous cutting cycles, if history is of any guidance. While the easing cycle in Europe seems to be concluded, hence bull steepening twists of the curve are admittedly less unlikely, back-end sell-off may drag the curve steeper.

With the disinversion and normalization of the German curve, 5s30s steepening expressions are no longer burdened by punitive carry and rolldown profiles. With the cash rate at 1.92%, 5s30s steepeners now offer a 3-month carry and rolldown return of 2.24bps—an attractive proposition for strategic positioning.

 

Sentiment

Typically, the 5s30s segment is the preferred expression among investors, as it captures both the monetary policy cycle and fiscal dominance at the long end of the curve. As a result, 5s30s has become a consensus trade, with recent price action largely driven by positioning dynamics.

Global curve steepening across G3 markets has been a defining theme in recent months, reflecting relentless investor appetite to re-enter steepener trades. For reference, US Treasury 10s30s curve versus German and other developed market curves remains in the middle of its surprisingly stable range, indicating the very high beta curves are trading across jurisdictions.

This trend appears to have further room to run. Deficit trajectories and supply/demand imbalances remain central concerns across all jurisdictions. Price-sensitive investors have increasingly replaced price-insensitive ones (i.e., central banks), following years of asset purchase programs that supported valuations across developed markets. Fiscal dominance and the erosion of institutional legitimacy in the US have largely preserved cross-asset price dynamics, with the US Dollar enjoying a breather over the summer before resuming its under-owned status in anticipation of a dovish Fed meeting. With job growth running well below the consensus breakeven rate and a Federal Open Market Committee (FOMC) accommodating market easing expectations, equities have continued to march higher, led by cyclical and higher beta sectors.

In the euro rates space, sentiment is also being shaped by the Dutch pension transition and speculation around the potential unwinding of long-end cash positions in core countries. This stems from a reduced need to receive exposure at the ultra-long end of the EUR curve. Core country curves versus Germany have widened sharply, and this pressure may continue to keep the long end better offered.

Important Information

Author

Luca Ferramosca
Portfolio Manager
Luca Ferramosca, CFA, is a portfolio manager with a focus on sovereigns. Prior to his current role, he worked as an institutional sales analyst at Aegon AM. 
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