Bund Yields Rise as AfD Win and ECB Take Center Stage

Germany’s 10-year Bund yield edged up to 3.36% on Monday, moving closer to a more than 15-year high of 3.3951% touched last week, as investors remained cautious following the far-right AfD’s strong victory in Saxony-Anhalt and ahead of this week’s ECB meeting. The AfD won 44% of the vote, falling short of an overall majority but dealing a major blow to Chancellor Friedrich Merz’s conservatives. Meanwhile, Brent crude moved closer to seven-week highs after the US struck three Iranian oil tankers over the weekend, destroying one, while Tehran threatened a new restricted zone outside the Strait of Hormuz. Higher energy prices have fueled a global bond selloff, with German borrowing costs rising for a fourth straight week as inflation pressures and resilient growth keep central banks under pressure to tighten policy. The ECB is expected to raise rates on Thursday, with markets pricing around a 90% chance of another hike by year-end.

Germany’s 10-year Bund yield stabilized around 3.35% as investors assessed stronger-than-expected US employment data while positioning ahead of next week’s European Central Bank policy meeting. US nonfarm payrolls rose by 162,000 in August, significantly exceeding market expectations for a 56,000 increase and prompting markets to price in a near 60% probability of a Federal Reserve rate hike this month. In Europe, money markets continue to fully price in a 25-basis-point ECB rate hike to 2.5% next week, while assigning an almost 100% probability that the deposit rate will reach 3% by June 2027. This pricing implies two additional rate increases by mid-2027, keeping upward pressure on European borrowing costs. On the economic data front, Germany’s factory orders increased 2.5% in July, slowing from an upwardly revised 3.7% rise in June but comfortably exceeding market expectations for a 0.3% gain.

Germany’s 10-year Bund yield edged higher to 3.36% on Friday after falling in the previous session, as investors awaited fresh direction from US employment data due later in the day, while attention gradually shifted towards the European Central Bank’s September 10 meeting. The global bond market found some relief on Thursday after Federal Reserve Governor Christopher Waller eased expectations of a near-term Fed rate hike, sending the dollar lower, while the recent rally in oil prices also lost some momentum. Bond yields, nevertheless, remain elevated amid persistent concerns over energy-driven inflation, higher interest rates and fiscal sustainability in countries including France and the UK. Money markets continue to fully price in a 25-basis-point ECB rate hike to 2.5% next week. Markets are also pricing in an almost 100% probability of the deposit rate reaching 3% by June 2027, implying two further rate increases by mid-2027.