Bund Yields Rise as Rate-Hike Bets Strengthen

Germany’s 10-year Bund yield climbed back above 3.5%, returning to levels not seen since mid-2009, as oil prices rebounded amid uncertainty surrounding US-Iran talks and investors assessed stronger-than-expected PMI data. Eurozone private-sector activity expanded in September at its fastest pace in almost three-and-a-half years, reinforcing expectations that the European Central Bank could raise interest rates further this year. ECB official Joachim Nagel said Tuesday that oil prices were becoming an increasingly important factor in monetary-policy decisions and left the door open to further rate hikes. Also, Chief Economist Philip Lane warned that another surge in energy prices could keep eurozone inflation elevated for longer than expected. In the US, investors increased bets on further Federal Reserve rate hikes following a series of hawkish comments from policymakers and stronger-than-expected PMI data.

Germany’s 10-year Bund yield held around 3.45% as falling oil prices prompted traders to scale back expectations for further ECB rate hikes, while investors assessed stronger-than-expected PMI data. Brent crude fell amid signs of progress in renewed US-Iran talks and efforts to restore a key Saudi Arabian pipeline. ECB official Joachim Nagel said oil prices were becoming an increasingly important factor in rate-setting and left the door open to further hikes, citing still-high core inflation, while adding that he had so far seen no significant second-round inflation effects. ECB Chief Economist Philip Lane, however, warned that another surge in energy prices could keep eurozone inflation elevated for longer than expected. Meanwhile, flash PMI data showed eurozone private-sector activity expanding in September at its fastest pace in almost three-and-a-half years. In the US, investors increased bets on further Fed rate hikes following a series of hawkish comments from policymakers.

Germany’s 10-year Bund yield reversed an early rise to fall below 3.45% on Tuesday, its lowest level since September 9, extending a seven-basis-point decline in the previous session as oil prices resumed their recent slide. Brent crude fell below $100 a barrel following reports that Iran could reopen the Strait of Hormuz if the US lifted its blockade of Iranian ports. Eurozone bond yields have climbed to multi-year highs in recent weeks, as concerns over an energy-driven inflation shock have strengthened expectations for higher interest rates. Investors are also weighing elevated government debt and increased corporate borrowing to finance AI investment. Political uncertainty is adding to market concerns, with Germany’s governing CDU suffering its worst-ever result in Mecklenburg-Western Pomerania. The party failed to win a single seat, prompting some members to call for Chancellor Friedrich Merz to step down after 16 months in office.