Euro zone government bond yields held near multi-year highs on Wednesday as a fresh surge in energy prices stoked inflation fears. Money markets have almost fully priced in a quarter-point ECB rate hike on Thursday, and traders now bet policymakers keep policy restrictive well into late autumn.
Euro zone government bond yields held near multi-year highs on Wednesday, and a fresh surge in energy prices raised the odds that the European Central Bank keeps policy tight well past its Thursday meeting.
Bund yields near their highest since 2011
The benchmark German 10-year Bund yield traded near 3.382%, holding close to its highest level since August 2011 touched in the previous session. At the short end, Germany's two-year Schatz yield anchored near 2.984%, hovering near its highest level in two years as traders prepared for the ECB to raise borrowing costs at its Thursday meeting.
Markets price a quarter-point hike
Money markets have almost fully priced in a 25-basis-point interest rate increase from ECB President Christine Lagarde and the Governing Council on Thursday. With energy import costs soaring, traders increasingly bet that policymakers will keep policy restrictive well into late autumn. The rise in European yields stems from inflation fears tied to energy benchmarks, which threaten import-dependent European economies.
Energy prices spike on Middle East escalation
Brent crude traded just cents away from the $100-a-barrel threshold following an escalation in Middle East military friction and threats to Persian Gulf shipping lanes. Crossing triple digits threatens to reignite broad-based headline inflation and squeeze corporate margins. Dutch TTF wholesale natural gas futures, meanwhile, hovered close to their highest level since 2022, driven by delayed LNG shipments and concerns over winter storage replenishment ahead of heating season.
The surge followed coordinated strikes on Tuesday by Iranian-backed Houthis in Yemen targeting several Saudi Arabian cities, drawing a key U.S. regional ally deeper into the conflict. The attacks coincided with direct U.S. strikes against multiple Iranian oil tankers, which Iran answered with a missile strike on a U.S. military base in Jordan.
Beyond Thursday's decision, European fixed-income desks are looking ahead to U.S. Producer Price Index and Consumer Price Index data due later this week.
Source: Investing.com
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