German 10-year bond yield hits 12-year high as prices slump

On Monday, pricing in derivatives markets showed that traders think there is just a 20% chance that the ECB raises rates again. Italy's 10-year bond yield was last up 8 bps at 4.665%, after rising 4 bps the previous week.

Longer-dated euro zone bond yields jumped on Monday - with Germany's 10-year yield hitting its highest since 2011 - as investors continued to adjust to the new "higher-for-longer" interest rate stance of the world's biggest central banks.

Germany's 10-year bond yield was last up 7 basis points (bps) at 2.801% after reaching its highest level since July 2011 at 2.809%. Yields rise when prices fall, and vice versa. The ECB raised interest rates to a record high of 4% on Sept. 14. The Federal Reserve held interest rates at 5.25% to 5.5% on Wednesday, followed by the Bank of England holding rates at 5.25% on Thursday.

Policymakers' overriding message was that interest rates will remain at high levels until inflation is clearly heading back down to 2% and is likely to stay there. "Markets have been adjusting to this higher-for-longer market narrative that central bankers have been trying to sell," said Jussi Hiljanen, head of European rates strategy at lender SEB.

"We are approaching the levels that we have had as targets for the end of this year. So I think it might continue a bit but I would say that most of the increase has been behind us." Expectations of higher interest rates push up yields and drag down prices as investors demand higher returns on their investments.

The only notable European economic data release of the day showed German business morale was slightly stronger than expected in September, even though it fell marginally compared to August. Shorter-dated bond yields rose less sharply, with Germany's two-year bond yield last 2 bps higher at 3.264%, after rising 4 bps last week.

Inflation data for August in the euro zone is due out on Friday, with some countries releasing national data in the preceding days. On Monday, pricing in derivatives markets showed that traders think there is just a 20% chance that the ECB raises rates again.

Italy's 10-year bond yield was last up 8 bps at 4.665%, after rising 4 bps the previous week. The closely watched gap between Italian and German 10-year yields stood at 185 bps, around its highest since May.

French ECB official Francois Villeroy de Galhau on Monday signalled that interest rates were unlikely to go much higher and that the focus would now be holding them until inflation is defeated. ECB President Christine Lagarde and governing council member Isabel Schnabel are also due to speak on Monday, as well as the U.S. Fed's Neel Kashkari.

"Markets (are) likely watching for confirmation that interest rates across both economies were either at or very near the peak," said Nikesh Sawjani, an economist at British lender Lloyds.