Is the recent increase in long-term interest rates a threat to euro-area recovery?

Abstract:

After reaching historically low levels in the first half of 2016, European long-term interest rates recorded a notable increase at the end of 2016 and have generally stabilised since the beginning of 2017. In terms of timing, as Figure 1 shows, the increase in 10-year sovereign yields has been very much synchronised across the four largest euro-area economies, taking place mainly during the fourth quarter of 2016.

In terms of size however, the increase has been different in different countries. From October 2016 to May 2017, the biggest change in yield was in Italy (+141 basis points, bps), followed by Spain (+80bps), France (+67bps) and Germany (+45bps). From an historical perspective, the magnitude of this increase in interest rates is not particularly remarkable and is similar to the increase that took place at the beginning of 2015.

Overall, with the notable exception of Italy, European government yields are now back to the levels prevailing at the beginning of 2016 and are still well below historical averages.

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