Bund Yields Ease

Germany’s 10-year Bund yield slipped to 3.46%, near its lowest level in over a week, as easing oil prices and reduced concerns over Middle Eastern supply disruptions prompted investors to scale back expectations for further ECB tightening. Safe-haven demand also supported German government bonds. European bond yields nevertheless remain elevated amid signs of economic resilience, persistent energy-driven inflationary pressures, and concerns over France's public finances. The country's minority government seeks to reduce its deficit to 5% of GDP in 2027, despite uncertainty over parliamentary support for spending cuts ahead of next year’s presidential election. German politics also drew attention after Bärbel Bas announced her resignation as Labour Minister and SPD leader. Investors are now awaiting Wednesday’s US CPI report and remarks from ECB policymakers at this week’s IMF-World Bank annual meetings for clues on the monetary policy outlook.

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.