Bund Yields Remain Close to Three-Month Lows

Germany’s 10-year Bund yields were at 2.85% at the end of June, near their lowest since early March, as oil prices remained close to $70 a barrel and as central bankers prepare for the ECB’s Sintra Forum, with a key panel on Wednesday featuring ECB President Lagarde, new Fed Chair Kevin Warsh, and Bank of England Governor Andrew Bailey. Investors will watch for clues on their economic outlook and future policy direction. Since the interim US-Iran ceasefire reopened the Strait of Hormuz, oil and inflation expectations have dropped, leading markets to reduce bets on the scale of interest rate hikes from the ECB and Bank of England. Traders will also review new inflation data from Europe’s largest economies later this week.

Germany’s 10-year Bund yield traded around 2.84%, near three-month lows, as weak economic data and reduced expectations for further ECB rate hikes weighed on sentiment. The ECB raised interest rates by 25 basis points this month, in line with expectations. However, ECB President Christine Lagarde said yesterday that the central bank does not need to respond more aggressively to developments stemming from the Middle East conflict, noting that inflation is expected to return to target over the medium term. Markets have since scaled back some expectations for additional ECB tightening following Lagarde’s remarks, though investors still price in at least one further 25bps hike this year. Meanwhile, weaker economic data reinforced the cautious outlook. Preliminary PMI readings showed that private sector activity in Germany contracted at its fastest pace since 2024, while the broader euro area also remained in contraction territory.

Germany’s 10-year Bund yield fell to 2.924%, moving closer to its lowest level since March 17, as weaker economic data and more cautious signals from the European Central Bank reduced expectations for further rate hikes. June data showed private sector activity in Germany and business activity in France contracted, reinforcing concerns over the region’s growth outlook. ECB President Christine Lagarde also signalled that the central bank sees no need for a stronger policy response to the Iran conflict, noting there is no evidence of an inflation surge that would justify more aggressive tightening. Her comments contrasted with a more hawkish tone from the Federal Reserve, where markets continue to price rate increases. Earlier this month, the ECB raised rates by 25 basis points, but the move had limited market impact as it was widely expected.