Bund Yields Rise as Oil Surges, ECB Hike Bets Rise

Germany’s 10-year Bund yield approached 2.98%, its highest since June 19, as crude oil prices climbed following attacks in the Strait of Hormuz. The tensions pushed crude above $72 per barrel, its highest since early July, fueling inflation concerns. Traders increased bets on ECB rate hikes, with official Isabel Schnabel warning that the Iran conflict’s economic impact persists, as core inflation remains strong. Meanwhile, Germany’s cabinet approved a 2027 budget draft on Monday, planning €555.4 billion in spending and raising borrowing to €203.6 billion, up from April’s €196.5 billion estimate. In France, far-right leader Marine Le Pen was cleared to run in the 2027 presidential election despite a sentence requiring one year of electronic monitoring, which she says could force her to withdraw. Polls still show the National Rally as the frontrunner, while the centrist camp has yet to unite behind a clear successor to Emmanuel Macron.

Germany’s 10-year Bund yield remained steady at 2.92%, after rising 8 basis points last week, influenced by higher Japanese yields and a focus on long-term borrowing. Germany’s cabinet approved the first draft of the 2027 budget on Monday, with planned spending of €555.4 billion next year, and total borrowing rising to €203.6 billion, compared to the €196.5 billion signaled in April. Despite these changes, the 10-year Bund yield remains well below the multi-year high of 3.2% reached in May, when the Strait of Hormuz was effectively closed and oil prices surged, which could force the ECB to hike rates significantly despite slowing growth. Markets now see one more 25-basis-point ECB hike this year as likely, following softer inflation and dovish remarks from ECB President Christine Lagarde about a more balanced outlook for euro-area inflation and growth. Meanwhile, a weaker-than-expected US jobs report further reduced expectations for a near-term Federal Reserve rate hike.

Germany’s 10-year Bund yield rose to 2.93%, marking its first weekly increase since early June with a nearly 9 bp rise. Traders adjusted positions following the initial drop in yields after the US-Iran deal, while rising long-term yields in Japan, driven by concerns over increased spending, also pushed German yields higher. European bond yields remain well below the multi-year peaks seen in May, as falling crude prices, softer-than-expected inflation, and dovish comments from ECB President Christine Lagarde led markets to scale back bets on a third ECB rate hike this year. Money markets still view a second hike as more likely than not. June’s inflation data undershot expectations, with headline inflation easing to 2.8% and core inflation slowing to 2.4%. At the ECB’s Sintra Forum, Lagarde noted that risks to euro-area inflation and growth had become more balanced. Meanwhile, a weaker-than-expected US jobs report further dampened expectations for a near-term Federal Reserve rate hike.