Bund Yield Holds Firm on Strong Eurozone Data and ECB Rate Bets

Germany's 10-year Bund yield held above 3.15% on Thursday as stronger-than-expected eurozone growth and firmer inflation reinforced expectations that the European Central Bank could deliver a second interest rate hike this year, potentially as soon as September. The eurozone economy expanded 0.4% in the second quarter, beating forecasts of 0.2% and marking its strongest growth since early 2025. Spain led with 0.7% growth, while Germany, France, and Italy each expanded 0.2%, and the Netherlands grew 0.4%. Higher inflation readings in Germany and Spain further supported the case for additional ECB tightening. Meanwhile, renewed US airstrikes on Iran lifted oil prices and dampened risk appetite, while the Federal Reserve added to policy uncertainty by keeping interest rates unchanged despite three FOMC members dissenting in favor of a rate hike.

Germany's 10-year Bund yield rose to 3.18% on Thursday, approaching last week's 15-year high above 3.2%, as surging oil prices reinforced expectations that the European Central Bank could raise interest rates again this year. Energy prices climbed as the conflict between the US and Iran intensified, with a drone reportedly striking a US-owned gas storage tanker at Egypt's Mediterranean port of Damietta. Meanwhile, the Federal Reserve added to market uncertainty on Wednesday by leaving interest rates unchanged despite three FOMC members dissenting in favor of a rate hike, while Chair Kevin Warsh offered no guidance on the future policy path. On the data front, stronger-than-expected GDP growth across major euro area economies and higher inflation readings in Germany and Spain reinforced expectations that the ECB could deliver a second rate hike this year, potentially as soon as September.

Germany's 10-year Bund yield climbed to 3.12%, rebounding from two-week lows as renewed military exchanges between the US and Iran lifted oil prices and renewed inflation concerns. Investors also remained cautious ahead of the Federal Reserve's policy decision later in the day, with the central bank widely expected to keep interest rates unchanged, although markets continue to price in roughly a one-third chance of a 25 bp hike. In the euro area, money markets are pricing in nearly two ECB rate hikes by March 2027. ECB Governing Council member Peter Kazimir said at least one more rate increase will likely be needed to bring inflation under control, adding that a weaker economic outlook could justify even more tightening than markets currently expect. Chief Economist Philip Lane said the current inflation shock remains moderate, reinforcing the case for further policy tightening. Investors now await euro area inflation data later this week for fresh signals on the ECB's policy outlook.