Bund Yields Climb Ahead of ECB Decision

Germany's 10-year Bund yield hovered around 3.25% as investors refocused on growing expectations of December rate hikes by the Federal Reserve and the ECB, outweighing the downward pressure from falling oil prices after US President Donald Trump played down the prospect of further strikes on Iran. Bond markets initially rallied last week after the Democrats' sweep in the US midterm elections raised expectations of political gridlock and more limited fiscal spending. However, yields reversed course on Friday as stronger-than-expected October US employment data pushed the implied probability of a December Fed rate hike to 81%. Expectations of an ECB move are more subdued at 66%, reflecting the Eurozone's weaker growth outlook. European bonds also remain vulnerable to France's ongoing political and fiscal uncertainties, as well as uncertainty surrounding the ECB leadership transition following President Christine Lagarde's announcement that she intends to step down early.

Germany’s 10-year Bund yield fell below 3.25%, its lowest level since late August, and tracking US Treasury yields as investors sought safety following a sharp sell-off in technology stocks. The rotation out of AI and technology stocks continued today, amid concerns that the Democrats’ victory could bring tighter regulation of US data centers and AI. Meanwhile, their House takeover reduced the likelihood of further deficit-expanding legislation under Trump, easing concerns over US government borrowing. However, rising eurozone inflation and increasingly hawkish rhetoric from ECB policymakers continued to reinforce expectations of tighter monetary policy. Annual eurozone inflation climbed to a fresh 3-year high of 4% in October, largely driven by surging energy prices. Despite leaving interest rates unchanged last week, ECB officials signaled that further hikes may be necessary to contain inflationary pressures and prevent them from feeding through into wages.

Germany’s 10-year Bund yield fell below 3.3%, touching its lowest level since late August and tracking a decline in US Treasury yields following an unexpected Democratic sweep in the US midterm elections. The Democrats’ takeover of the House and Senat is seen as reducing the likelihood of further deficit-expanding legislation under the Trump administration, easing concerns about government borrowing. However, the decline in German yields was more modest than across other European bond markets, as new data pointed to persistent inflationary pressures, reinforcing expectations that further rate increases may be necessary. Eurozone annual inflation accelerated to 4% in October, its highest since September 2023 and well above the ECB’s 2% target, largely driven by surging energy prices. Despite last week’s decision to leave rates unchanged, officials signalled that further increases may be needed to contain inflation and prevent price pressures from spilling over into wages.