Euro zone benchmark Bund yields fell slightly from 17-year highs on Wednesday as a drop in oil prices caused traders to pause after raising bets on further European Central Bank rate increases.
Markets were also awaiting the Federal Reserve policy meeting decision later in the session, with traders widely expecting an increase of a quarter of a percentage point to a 3.75% to 4.00% range and guidance pointing to further tightening.
Traders continue to price ECB hikes
Traders see the ECB's deposit rate at about 2.85% by December, up from the current 2.50%. Markets expect the rate to reach roughly 3.4% by November 2027, fully pricing a third increase and pointing to a roughly 50% chance of a fourth move.
The ECB raised rates last week for the second time this year to quell inflation that has been driven higher by rising energy prices and warned that price pressures could prove lasting, fuelling bets on more tightening.
Some analysts argued that expectations for rate increases had gone too far, saying higher energy prices would weigh on growth and help to dampen inflation.
German two-year bond yields DE2YT=RR, more sensitive to policy rates, fell 3 bps to 3.203% after reaching 3.3123% on Monday for their highest since September 2023.
The ECB's updated wage tracker is pointing to a modest increase in negotiated pay growth in the first half of 2027 after broadly steady increases for the rest of this year.
“Despite the likely acceleration in 2027 negotiated pay growth, we read this as a normalisation after a subdued 2026 rather than a new cycle,” said Citi economist Giada Giani.
“Coupled with the cyclical pick-up in labour productivity growth, this should lead to further deceleration in unit labour costs,” she added.
French and Italian spreads remain elevated
France’s 10-year government bond yields FR10YT=RR fell 3 bps to 4.468% after hitting 4.5531% on Tuesday for the highest level since September 2008. The yield gap versus safe-haven Bunds DE10FR10=RR was at 96 bps after reaching 98.15 bps on Tuesday, the highest since July 2012.
The French government is due to present a budget proposal soon, a particularly delicate exercise as parties in the divided parliament harden their positions ahead of the 2027 election.
Italy’s 10-year government bond yields IT10YT=RR fell 4 bps to 4.38%. The yield gap versus safe-haven Bunds was at 86 bps.
Germany, U.S. and France bond yields retreat from peaks
Germany's 10-year bond yield was down 3 basis points at 3.504% after reaching 3.5723% on Tuesday for its highest since June 2009.
“Hopes are high for the Fed to upend the severe bond market selloff,” said Commerzbank rate strategist Hauke Siemssen.
“While the increase in oil prices was still the major driver of late, a determined Fed could calm investors' nerves, at least at the long-end.”
The benchmark 10-year U.S. Treasury yield US10YT=RR was down 4 bps after rising to 5.041% on Tuesday, the highest since July 2007.
Oil prices declined, helped by reports that Saudi Arabia was offering additional crude cargoes via Oman which eased concerns about supply disruptions. Brent crude LCOc1 was last down 3% at $105 a barrel.
European natural gas prices TRNLTTFMc1 fell slightly but remained around their highest levels since late 2022.
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