Update Bonds: Who shapes bond markets?
The past year has shown that bond markets do not operate in isolation. Political developments, particularly surrounding US President Donald Trump, have repeatedly influenced market sentiment. Investors have had to assess whether political pressure could eventually affect interest rate policy. A concern that naturally draws attention to the role and independence of central banks.
In the US, this question became more relevant as discussions around future monetary policy intensified. At the same time, the Federal Reserve moved quietly to reappoint several regional Fed presidents. While this passed largely unnoticed outside financial circles, it is an important institutional signal. Monetary policy decisions in the US are made by a committee rather than by a single individual, and these regional presidents play a key role in that process. By renewing these appointments ahead of time, the Fed reinforced continuity and reduced the scope for abrupt political influence.
Recent comments from Stephen Miran illustrate this institutional dynamic. Miran, who was temporarily appointed to the Federal Reserve by Trump, and is a fierce believer in Trump policy, has argued that central bank credibility should not be compromised. His message was not political but practical, that while elected officials often focus on short-term economic outcomes, central banks must safeguard long-term price stability and confidence in the currency. Attempts to push interest rates lower for political reasons risk backfiring if they raise inflation expectations, which could ultimately push long-term interest rates higher.
Against this backdrop, the outlook for monetary policy remains relatively stable. According to ABN AMRO Group Economics, the European Central Bank (ECB) is expected to keep policy rates unchanged for the time being. Inflation in the euro area has eased, but not enough to justify rapid further easing. In contrast, the Federal Reserve is expected to gradually lower interest rates next year as inflation pressures continue to fade and economic growth moderates. This difference already explains part of the gap between US and European bond yields.
Central banks, however, are only part of the equation. Another key question is who actually holds government bonds. Recent ECB analysis shows that European banks have once again become important buyers of government debt, particularly in core markets, such as Germany. Foreign investors remain active as well, especially where yields are slightly higher. This broad investor base helps absorb large issuance volumes and supports market stability.
Structural changes are also underway. In the Netherlands, pension funds are adjusting their portfolios as a new pension system is implemented. The transition reduces the need to hold very long-dated bonds purely for liability matching. As a result, some pension funds are gradually scaling back exposure at the long end of the market. This does not imply reduced interest in bonds overall, but it does change demand dynamics.
These developments help explain why there may be room for further steepening of the yield curve. In simple terms, this means that long-term interest rates rise slightly relative to short-term rates. With central banks keeping short-term rates broadly stable while demand for long-dated bonds becomes less dominant, such a move would reflect changing market structure rather than renewed inflation stress.