Rates Spark: Pension reform unaffected by Dutch political turmoil

There were no outsized moves in long-end rates as markets approach the bigger events of the week ahead. The 10y Bund yield has inched above 2.5% again while the 10y Treasury yield bounced off 4.4% on the back of a more hawkish comment from Atlanta Fed President Raphael Bostic.

In other times, a eurozone headline inflation reading dropping below the ECB’s target would likely have elicited a bigger reaction. But going into the meeting, the market is already fully priced for a rate cut on Thursday. And for the months ahead, the market is already eyeing an ECB potentially cutting beyond even 1.75% early next year as tariff uncertainty weighs on the outlook.

It is mostly this sentiment around US-EU trade relations that is driving pricing, with tensions having risen again of late. Trump's doubling of steel tariffs is a good example. The 9 July deadline to negotiate a deal is approaching fast, with limited progress visible so far.

The fall of the coalition shouldn't disrupt the ongoing Dutch pension reforms. If anything, a caretaker government won't be able to make any drastic changes to the legal framework. The current polls suggest that the parties against the pension reforms won't find a majority in the next parliament, which reduces the chance of further proposals to change the transition rules. Even if pensions become a hot topic in public debate again, changing anything before the transition date of 1 January 2026 will be difficult, if not impossible. New elections would likely take place in October or November.

Having said that, we do still see a tail risk that pensions become a hot campaign topic if market moves push funding ratios below 100%. A 100bp decline in the 20y swap rate and a sharp equity sell-off could be a catalyst. In this case, pension funds would have to cut promised payments when transitioning. Such cuts would be politically sensitive and could trigger more parties to attempt to interfere with the reforms.