Live Markets: Bellies pinched as central bank expectations shift

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10/12/2025 12:57

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BELLIES PINCHED AS CENTRAL BANK EXPECTATIONS SHIFT

A shift is underway in several markets as traders coalesce around the idea that central banks could well be done with easing and that's hitting five-year government bonds, often known as the 'belly' of a yield curve.

Take Germany, for example. In December so far, benchmark 10-year yields are up 18 basis points, DE10YT=RR near-term-rate sensitive yields are up 15 basis points, DE2YT=RR but five year yields are up 20 bps. DE5YT=RR

The same can be seen more dramatically in the New Zealand curve, and in the Australian one too, to a degree. 0#NZBMK=, 0#AUBMK=

It's not a huge surprise. Laurence Mutkin, head of EMEA rates strategy says in a Wednesday note "the belly of 2s5s10s always underperforms at the end of a rate-cutting cycle."

"History suggests 5 years can cheapen by at least another 30 basis points vs 2s&10s, as the rate cycle reaches its trough."

The Reserve Bank of Australia this week ruled out further policy easing, after holding interest rates steady at 3.6% and warned the next move could be up.

The same day, ECB board member Isabel Schnabel said the European Central Bank's next move may be a hike, even if not in the near future.

The logic of why this hits the belly of the curve is that 10-year yields are affected by term premia and all sorts of long-term expectations, while the front end of curves -- 2 year and below -- moves around trying to find the precise low.

But for the five-year point, it doesn't really matter exactly when central banks start hiking rates, what matters is that such moves are on the way in the medium term.

(Alun John)

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