Bund yields edged lower after hitting fresh 15-year highs on Tuesday as investors processed issues ranging from elevated energy prices to German political uncertainty and volatility in Japan before this week's ECB meeting.
Germany's 10-year bond yield, the benchmark for the euro zone, was last down 2.5 basis points (bps) at 3.36%, after reaching 3.3982%, the highest since April 2011 DE10YT=RR.
Rate-sensitive 2-year yields fell 1.5 bps to 2.98%, around a two year top. DE2YT=RR
ECB meeting, energy prices and Japan keep traders focused
Bond yields have been rising around the world as high energy prices underpin fears of a surge in inflation that will force a faster pace of central bank rate hikes — particularly a factor for shorter-dated yields — while longer-dated yields have also been rising on the back of strong global economic growth and worries about government deficits.
Investors will get an update on the former this week, with Thursday's European Central Bank meeting. The ECB is widely expected to raise rates, with the key question for investors being whether they will give any indications about their future plans.
Markets see around an 80% chance of a further rate hike by December this year, on top of a move this week and in June.
Laura Cooper, global investment strategist at Nuveen, said however that traders have got ahead of themselves, "pricing further tightening that is not supported by unfolding data."
"For the ECB to hike again later this year, as markets are largely pricing for December, there would need to be renewed wage pressure or clearer evidence that higher energy costs are feeding into underlying inflation and medium-term inflation expectations," she said.
Recent data showed that services inflation, closely watched by the ECB, had dropped despite August's overall jump in price growth.
But there is plenty for investors to process before Thursday, including the climb in energy prices, with Brent crude LCOc1 closing in on $100 a barrel and Dutch benchmark wholesale gas prices TFMBMc1 around their highest since late 2022, and far above the ECB's current forecasts. NG/EU O/R
The far-right AfD's historic victory in a German state election at the weekend increased political uncertainty in the euro zone's largest economy, though so far it has caused little market reaction.
Investors are also watching to see whether ructions in Japan's bond market spill over elsewhere, and whether higher yields in Japan cause a rerouting of investment flows.
Long-dated Japanese government bonds, which have been under pressure, rallied on Tuesday, flattening the yield curve. JP/
Other euro zone yields were largely moving in line with the benchmark. France's 10-year yield FR10YT=RR dropped 2.5 bps to 4.22%, though sitting near its highest since 2008. Italy's was down 1 basis point at 4.20%. IT10YT=RR
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