Euro zone yields hit multi-year highs as inflation data cements September rate expectations

Euro zone government bond yields nudged up ​to fresh multi-year highs on Tuesday as ​Europe joined a global bond selloff and ‌after inflation ​data was hot enough to cement bets on a European Central Bank increase to interest rates this month. Germany's 10-year yield, the benchmark for the euro zone, hit ‌a 15-year high of 3.36% and was last up 1 basis point at 3.33%. It rose 5 bps on Monday.

German 30-year yields hit their highest since 2011 at 3.8458% and were last down 0.5 bps at 3.80%. Yields have been ‌spiking from Tokyo and Sydney to New York and London as the U.S.-Israeli war on Iran stokes energy ‌costs globally, threatening broader price rises and bringing more increases to central bank interest rates. Large debt issuance by tech giants and worries over countries' fiscal health have added to the upward pressure.

Japan's 10-year yield hit 3% on Tuesday for the first time in 30 years. In Europe, data ⁠showed inflation ​in the euro zone accelerated ⁠to 3.3% in August from 2.9% in July, driven almost entirely by higher energy costs as crude oil and natural gas prices both rose ⁠and refiners bumped up their margins.

Underlying price pressures remained modest, however, offering some reassurance to policymakers that the energy price surge ​is not yet setting off the kind of second-round effects that could perpetuate rapid inflation and force the ⁠ECB into more aggressive action. "For the European Central Bank, the jump in the headline inflation rate makes a September hike easier to sell," Bert Colijn, ⁠chief ​economist for the Netherlands at ING, said in a note.

"But the stubbornly benign core inflation rate should make for an interesting debate about a possible subsequent hike into restrictive territory." Germany's interest-rate-sensitive 2-year yield rose 2 bps to 2.94%, ⁠with money markets all but fully pricing a September ECB rate increase. A further 25 bps hike is priced ⁠by February next year.

Brent crude ⁠last traded above $92 a barrel, up nearly 2% on the day. Benchmark natural gas prices were also higher. French 10-year yields rose 2 bps to 4.19% while the Italian equivalent ‌touched 4.22% ‌for its highest since 2023.