The rise in the Euribor in recent days, which has recovered 2.5%, hides underlying movements in the financial markets and in the indicator itself. The negative differential of the twelve-month index with the shortest terms has narrowed to levels not seen in six months, anticipating a slowdown in the fall of the Euribor for 2025.
The Euribor curve is beginning to disinvest at a rapid pace and this is not good news for mortgages. The twelve-month Euribor spent all of 2024 with a much lower rate than the shorter-term indiceswhen historically it is usually higher, offering a premium compared to the rest of the indices. The interest on the Euribor in its different maturities works like bonds in the secondary market, although it is the banks that set the rates in the interbank market, it has its own interest curve.
The normal thing is that the twelve-month Euribor, which decides the future of variable-rate mortgages, marks a higher interest rate, since it is a longer-term loan. On average, fluctuates close to 0.2 percentage points with respect to the six-month, three-month and one-month Euribor. This is always the case, except for changes in the downward rate cycle. And this time it happened in a wild way.
Since the Euribor was launched in 1999, there has never been a negative differential for the twelve-month Euribor, as marked as in the middle of last year. The underlying reading of the great short circuit is that the Europeans themselves, those who make up the panel of financial entities to prepare the interbank indices, anticipated large rate cuts for the ECB during the following twelve months, and with them large falls in the Euribor for the benefit of many mortgage holders.
For now, the banks’ own forecasts are not failing. The ECB has not forgiven any meeting to lower rates since last June. It has taken the main market reference, the deposit rate, from 4% to 3% and the Euribor has responded with a good fall. At the end of 2023 it was at 3.68% and ended 2024 at 2.43%.
The Euribor gets angry
The Euribor on mortgages is running so high that it has even outpaced the ECB itself and its deposit rate, getting ahead of the current bearish rate cycle, but that dynamic is very close to breaking.
The twelve-month Euribor has started the year with strong increases, recovering the level of 2.5%, but the big problem is that the rest of the index curve has not moved with such intensity and the negative spreads have narrowed to levels not recorded since mid-2024, when expectations of current rate cuts came to a screeching halt amid a threat of a rebound in inflation. This circumstance occurs with the six- and three-month Euribor.
Just before the ECB lowered rates, the gap between the different Euribor rates narrowed so much that they almost touched each other due to the market’s doubts that the central bank was going to start cutting rates. Once executed and with the economic data in favor, the twelve-month Euribor began to run until this moment.
Trump effect
Right now, chaos reigns in the financial markets due to Trump’s arrival at the White House after winning the elections last November. The measures he is considering to begin his mandate, starting with a cannon of tariffs for Europe and Asia, and ending with a large tax cut, on paper mean unleashing inflationary pressures around the world again.
The Federal Reserve took note of Trump’s electoral promises and has already pressed the brakes on rate cuts in 2025. But these days, as the New York magnate’s inauguration approaches, fixed income markets are tightening, infecting the Euribor.
What does all this mean for mortgages? Well, the broad brush explanation implies that the falls will be less intense and will end earlier for the Euribor in 2025. Market expectations have only predicted a rate cut by the ECB for this year, but they still predict that the deposit rate will reach 2% between June or July of this year, which leaves room for the Euribor to continue falling but with a limited range. It will be difficult to see the index so separated from the ECB rates this year, when the bottom is already beginning to be seen for the beginning of summer. Three-month Euribor futures, expiring in December 2025, have risen these days, recovering 2% levels.
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