Bund Rout Pauses After Yields Hit 17-Year High

Germany’s 10-year Bund yield fell below 3.55%, retreating from a 17-year high, as investors weighed demand for safe-haven assets against expectations for further ECB rate hikes through 2027 as the energy shock deepens. 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.

Germany’s 10-year Bund yield fell toward 3.55% at the end of September, moving away from a 17-year high of 3.65% reached earlier in the week, as markets became more cautious about further central bank rate hikes. Still, Bunds suffered a sharp selloff over the month, with yields rising 27 bps, driven by higher energy costs fueling inflation concerns and expectations that the AI boom could support growth, reinforcing bets on higher-for-longer interest rates. Political uncertainty ahead of elections in France, Spain and Italy next year also kept pressure on bonds. Meanwhile, the tone improved on Wednesday as central bankers pushed back against expectations of rapid and sustained tightening. ECB official Peter Kazimir said that the central bank has time to keep policy flexible after two rate hikes this year, echoing President Christine Lagarde’s comments earlier this week. In the US, Fed's John Williams similarly said there was time to assess incoming data before raising rates again.