German Bund Yields Surge as ECB Rate Hike Bets Intensify

Germany’s 10-year Bund yield fell further below 3.45% after touching a 17-year high, as the sharp selloff in European government bonds paused and investors weighed demand for safe-haven assets against expectations for further ECB rate hikes through 2027. French bond yields remained near a more than two-decade high amid concerns over public finances, while political uncertainty ahead of the 2027 elections in France and Italy added to fiscal concerns. Investors also digested stronger-than-expected Eurozone inflation, which accelerated to 3.8% last month, its highest since September 2023 and well above the ECB’s 2% target, driven largely by higher fuel prices. ECB’s Isabel Schnabel said the coming months would be key to assessing the energy shock and determining how high rates need to rise, signaling a cautious approach. Still, markets price one further 25-basis-point hike by December, with a small chance of a second, and see the deposit rate reaching around 3.4% by late 2027.

Germany’s 10-year Bund yield fell below 3.5%, retreating from a 17-year high, as investors weighed demand for safe-haven assets against expectations for further ECB rate hikes through 2027. French bond yields, meanwhile, surged to an over two-decade high after posting their biggest quarterly increase in nearly four decades, as the minority government unveiled a plan to cut the budget deficit, although the fiscal watchdog warned that its economic assumptions were “optimistic.” Expectations for higher ECB rates are pushing borrowing costs across the euro area, raising concerns over debt affordability in the bloc’s most indebted economies. Political uncertainty ahead of the 2027 elections is adding to concerns over their fiscal outlooks. Money markets now price the ECB’s deposit rate at around 2.8% by December, implying one further 25-basis-point hike and a 24% chance of a second move. Markets also see the policy rate reaching around 3.4% by late 2027.

Germany’s 10-year Bund yield rose back above 3.6%, near its highest level since June 2009, as a deepening energy shock strengthened expectations for further ECB rate hikes through 2027. French bond yields also surged to a fresh 18-year high after recording their biggest quarterly increase in nearly four decades, ahead of the government’s budget announcement. Expectations for higher ECB rates are pushing borrowing costs higher across the euro area, raising concerns over debt affordability in the bloc’s most indebted economies. Political uncertainty ahead of the 2027 elections is adding to concerns over their fiscal outlooks. Oil prices rose as investors weighed increased Middle East energy flows against the ongoing US-Iran impasse, keeping inflation risks in focus. Money markets are now pricing the ECB’s deposit rate at around 2.8% by December, implying one further 25-basis-point hike and a 24% chance of a second move. Markets also see the policy rate reaching around 3.4% by late 2027.