German and French long-dated yields at highest in over 15 years

German and French long-dated government bond yields were ​at their highest levels in over 15 years on Monday ​as oil prices rose and Federal Reserve Chair Kevin ‌Warsh ​signalled interest rate hikes may be needed if inflation remains above target. Markets are closely monitoring the bond supply for both countries, as Germany ramps up spending on infrastructure and defence, while France heads into ‌a difficult budget battle with investors looking for evidence that Paris can regain control of its public finances.

Investors also fear that geopolitical tensions could fuel further defence spending. Oil prices roseafter fresh fighting erupted between the U.S. and Iran. Iran's army said that it had attacked the United Arab Emirates' Al Minhad ‌Air Base after a U.S. attack, but the UAE said in a defence ministry statement that the reports were false.

Germany's 10-year bond yield ‌was up 3 basis points to 3.3025%, the highest since May 2011. U.S. two-year Treasury yields jumped and the yield curve flattened on Friday after Warsh's comments. They were down 2.5 bps in London trade after rising 12 bps on Friday. Benchmark U.S. 10-year Treasury yields fell one bp 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 European Central Bank rate hike," said Rainer Guntermann, rate strategist at Commerzbank. "Month-end flows should provide temporary relief today," he added.

German two-year bond yields were up 2 ⁠bps at 2.90%, after reaching 2.9096%, the highest since July 2024. The French short-dated yield also hit the highest since summer 2024 at 3.1064%. Traders are pricing the ​ECB'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 2.95% by September 2027. "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. Inflation ⁠quickened in four key German states in August, preliminary data showed, suggesting Germany's national inflation rate could increase this month.

French borrowing costs remained close ⁠to their highest levels in about ⁠18 years. France's 10-year bond yield rose 2.5 bps to 4.1504%, the highest since November 2008. The 30-year was at 4.9151%, after touching 4.9232% last week, its highest since September 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.