German long yields at highest in over 15 yeas; ECB rate priced near 3% in late 2027
German and French long-dated government bond yields were at their highest levels in over 15 years on Monday as oil and natural gas prices rose and Federal Reserve Chair Kevin Warsh signalled 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 and France heads into a difficult budget battle with investors looking for evidence it can control public finances.
Investors also fear that geopolitical tensions could fuel further defence spending. Oil prices rose after fresh fighting erupted between the U.S. and Iran. Iran's army said it had attacked the United Arab Emirates' Al Minhad Air Base after a U.S. attack, but the UAE said the reports were false.
Investors are watching also the so-called crack spread, a measure of refining margins. The ICE heating oil/Brent crack spread
Natural gas prices, a key driver of euro zone inflation expectations, rose 5% to €70.70, their highest since March. They were at around €51 in early August. EU gas stores are 64.7% full, the lowest for this time of year in records going back to 2011 and 12.4 percentage points below last year’s level, data from Gas Infrastructure Europe shows.
Germany's 10-year bond yield was up 5 basis points to 3.3233%, the highest since May 2011. U.S. 2-year Treasury yields jumped and the yield curve flattened on Friday after Warsh's comments. They were little changed on Monday.
"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 2-year bond yields were up 3 bps at 2.9237%, the highest since July 2024. The French short-dated yield also hit its highest since summer 2024 at 3.1202%. Inflation quickened in four key German states in August, preliminary data showed, suggesting the national rate could increase this month.
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%. Investors are also positioning for rates to move closer to 3% by late 2027, with the deposit rate priced at 2.98% 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.
FRENCH BORROWING COSTS AT HIGHEST IN ALMOST 18 YEARS France's 10-year bond yield rose 4.5 bps to 4.1729%, the highest since November 2008. The 30-year yield was at 4.9408%, its highest since September 2008.
Yields on Italian 10-year and 30-year notes reached their highest since June 2024 and November 2023 at 4.11640% and 4.9355% respectively.
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