German yields, gas prices and ECB rate expectations
Germany's 10-year bond yield DE10YT=RR was up 4 basis points (bps) at 3.375%. Last week, it hit 3.3951%, the highest since April 2011.
"The impact on Bunds or Länder bonds looks set to be marginal," said Rainer Guntermann, strategist at Commerzbank, referring to the election result.
"If anything, it should be negative, given that the infighting within the federal government after the poor showing of the CDU and SPD will complicate the implementation of reform plans for the rest of the year."
German 2-year bond yields DE2YT=RR were up 5 basis points (bps) at 2.98%, in line with increases in other euro zone bonds of that maturity.
Investors remain focused on natural gas prices, a major source of inflationary pressure in the euro area, which rose after attacks on oil tankers further dimmed hopes of reviving Qatari liquefied natural gas (LNG) flows from the region.
The benchmark Dutch front-month contract at the TTF hub TFMBMc1 was up 1.2% at €72.85 per megawatt hour (MWh). It reached €75.325, the highest level since January 2023, last week.
Traders were pricing the European Central Bank's deposit rate at 2.78% by December, implying more than an 80% probability of a second rate hike after the widely expected increase this week, from the current 2.25%. They continued to build momentum towards a terminal 3%, with the policy rate last seen at 3.0% by September 2027.
"We do not see further hikes in 2026 but are watching renewed upside risks from gas and food which could make inflation more entrenched and start to feed second-round effects that are not yet visible," said Alessia Berardi, head of global macroeconomics at Amundi Investment Institute.
"At the same time, growth risks and pressure in sovereign yields could keep it from moving too aggressively,” she added.
The ECB will raise interest rates on September 10 for the second and final time in what would be its shortest hiking campaign in 15 years, according to a Reuters poll.
Italy’s 10-year government bond yields IT10YT=RR rose 5 bps to 4.197%. The yield gap versus safe-haven Bunds was at 81.85 bps.
Bund yields rise after election and before ECB meeting
Euro zone benchmark Bund yields rose on Monday, after two straight daily declines from their highest in more than 15 years, with investors cautious following the Alternative for Germany victory in Saxony-Anhalt and before the European Central Bank policy meeting.
While short of an overall majority, the AfD won 44% of the vote and delivered a drubbing to Chancellor Friedrich Merz’s conservatives.
Borrowing costs slipped on Friday but still posted a fourth consecutive weekly rise, as higher energy prices and resilient economic growth kept pressure on central banks to raise rates.
The ECB is widely expected to hike interest rates on Thursday, erring on the side of caution as the U.S.-Iran war drags on, keeping oil prices high and raising inflation again.
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