Bund Yields Near 3% as ECB Rate Hike Looms

German 10-year Bund yields hovered just above 3% as investors anticipated a likely European Central Bank rate hike next week, while cautiously hoping for progress in Middle East peace efforts. Markets now expect a near-certain 25-basis-point ECB rate increase at the June 11 meeting, with two or possibly three hikes projected for this year. This comes after euro-area inflation reached 3.2% in May, its highest in over two and a half years,with core and services inflation rising, indicating broader price pressures beyond energy. Yet, uncertainty persists as policymakers weigh high inflation against weak economic growth. One of the ECB’s most hawkish members, Isabel Schnabel, warned on Monday that it is too early to determine the exact number of rate hikes. Meanwhile, US-Iran talks continued, and military clashes between Lebanon and Israel persisted despite a pending US-brokered ceasefire.

German 10-year Bund yields eased toward 3% as a renewed decline in oil prices helped alleviate energy-driven inflationary pressures, slightly tempering expectations for further central bank rate hikes. The shift came as reports emerged that Israel and Lebanon had agreed to implement a ceasefire and end hostilities, raising hopes for a broader de-escalation in the US-Israeli conflict with Iran. However, Tehran denied any recent progress in talks with Washington over an interim peace deal, and fighting continued in Lebanon. On the monetary policy front, markets are now pricing in a near-certain 25-basis-point interest rate hike by the European Central Bank at its June 11 meeting, with two or possibly three increases expected by the end of the year. This comes after euro-area inflation hit 3.2% in May, its highest in over two and a half years, while core inflation reached 2.5% and services inflation climbed to 3.5%, signaling broader price pressures.

German 10-year Bund yields hovered at 2.95%, near the previous week’s two-month low of 2.93%, as oil prices dipped and mixed signals emerged on Middle East conflict resolution. US President Donald Trump and Israeli Prime Minister Benjamin Netanyahu offered conflicting accounts of a call about the Lebanon conflict, with Trump urging a ceasefire and Netanyahu’s stance less clear. This follows reports that Iran paused US negotiations, demanding an end to Lebanon clashes, though Trump claimed rapid progress. Investors also processed Eurozone inflation data, which rose to 3.2% in May, the highest since late 2023, with core inflation at 2.5% and services at 3.5%, indicating broadening price pressures. Markets now expect a 25-basis-point ECB rate hike next week, with two increases likely this year, though ECB’s Isabel Schnabel cautioned against overcommitting, while Lithuania’s Gediminas Šimkus sees another hike after June as probable.