Bund Yields Retreat as Oil Prices Ease

Germany’s 10-year Bund yield eased to 3.45%, moving further away from a 17-year high touched in late September, supported by falling oil prices and safe-haven demand. Brent crude retreated from recent highs as concerns over Middle Eastern oil supplies eased after US President Donald Trump said Washington would not launch an attack on Iran before the November midterm congressional elections, citing productive talks aimed at ending the conflict. Markets also scaled back expectations for ECB tightening, with the deposit rate now priced to rise from 2.50% currently to 2.72% by December and 3.20% by late 2027. Before the recent widening in bond spreads, investors had anticipated roughly one additional rate hike in early 2027. Meanwhile, borrowing costs and risk premiums on French and Italian government debt declined after rising sharply last week, as investors reassessed fiscal and political risks across the euro area.

German Bund yields edged up to 3.5%, while borrowing costs in more indebted euro-area countries surged as investors sought safe-haven assets amid a rebound in oil prices and persistent fiscal and political uncertainty across Europe. Brent crude rose back above $100 a barrel as Iran intensified attacks on shipping in the Strait of Hormuz, reinforcing expectations for further rate hikes from major central banks. The ECB is now seen hiking twice more by March 2027, while swaps price around 75 basis points of tightening by the end of next year. Meanwhile, French bonds remain under pressure as political uncertainty ahead of the 2027 election raises concerns over the country’s finances. The minority government has unveiled a deficit-reduction plan, though the fiscal watchdog warned its economic assumptions were “optimistic.” Political uncertainty is also rising elsewhere, with Spain calling a snap election for November 29 and Italy heading to the polls next year.

Germany’s 10-year Bund yield fell to 3.45%, retreating from the 17-year highs reached last week, as turmoil in bond markets prompted investors to scale back expectations for further ECB rate hikes. Markets are now pricing in an 80% probability of another rate increase by year-end. Whereas investors had previously expected at least three further hikes by March 2027, they are now fully pricing in just one additional move, with roughly an 80% chance of a second. ECB Chief Economist Philip Lane said on Monday that the recent surge in borrowing costs could weigh on the economy by curbing demand, potentially reducing the amount of further tightening needed to contain inflationary pressures. Meanwhile, the France-Germany 10-year yield spread narrowed further as investors reassessed whether France’s recent jump in risk premium had been excessive. In Spain, Prime Minister Pedro Sánchez called a snap election for November 29 following protests over rising housing costs.