German yields at multi-year highs after Warsh comments, oil prices up

German government bond yields hit fresh multi-year highs on Monday ​as oil prices climbed and Federal Reserve Chair Kevin ​Warsh signalled interest rates may need to ‌rise if ​inflation remains above target.

Brent crude futures were up 0.5% to $89.80 after the U.S. said it had attacked an Iranian island in the Strait of Hormuz and Tehran said ‌it had responded by targeting U.S. assets in the region. The UAE denied reports that Al Minhad Air Base had been targeted by missiles. German two-year bond yields were flat at 2.89%, after reaching 2.9014% earlier in the session, the highest since July 2024.

U.S. two-year ‌Treasury yields jumped and the yield curve flattened on Friday after Warsh's comments. They were down 2.5 basis points in ‌early London trade on Monday after rising 12 bps on Friday. Benchmark U.S. 10-year Treasury yields fell 1 bps after rising 5 bps on Friday. "Overall, Bunds cannot defy U.S. Treasuries headwinds, but should still outperform as the market is well-prepared for the next ECB rate hike," said Rainer Guntermann, rate ⁠strategist at Commerzbank.

"Month-end ​flows should provide temporary relief ⁠today," he added. Traders are pricing the European Central Bank's deposit rate at about 2.70% by December, implying an 80% chance of a second rate hike after ⁠one widely expected in September, from the current 2.25%.

Markets also suggested investors are positioning for rates to move closer to 3% by late ​2027, with the deposit rate priced at 2.94% by September 2027. Germany's 10-year bond yield was up 1 bp to 3.28%, ⁠after reaching 3.2903%, its highest since May 2011.

"Our base case remains that steady progress in underlying inflation will allow the Fed to keep rates ⁠unchanged ​this year," said Mark Haefele, chief investment officer at UBS Global Wealth Management. "Although the risk of a September hike has increased, the latest sequential inflation data remain consistent with further disinflation," he added.

French borrowing costs remained close to their highest levels in ⁠more than 18 years as the country faces a difficult budget battle in the coming months while investors look for signs ⁠Paris can regain control of ⁠its public finances. Yields on France's 10-year bond stood at 4.1284%, after hitting 4.1433% a couple of weeks ago, its highest since November 2008.

The spread over Germany's benchmark Bund yield was 84.30 ‌bps after hitting ‌88.30 bps last week, its widest since November 2024.