Euro zone yields rise as energy prices and central banks weigh on markets
Euro zone bond yields rose on Monday, with Germany's 10-year yield hitting its highest since mid-2009, as oil prices climbed and investors were on edge about how hawkish several major central banks may sound at their meetings this week.
Global bond markets have come under pressure from higher energy prices and growing worries about rising inflation and higher interest rates, with yields repeatedly climbing to fresh multi-year highs.
The yield on Germany's 10-year bond DE10YT=RR, the benchmark for the euro zone, climbed by more than 16 basis points last week, its biggest weekly rise since the first week of March, just after the Iran war began.
On Monday it set a more than 17-year high of 3.5382%, before paring gains. It was later at 3.5173%, 1.5 basis points higher on the day.
After the European Central Bank hiked interest rates by 25 basis points last week and left the door open to further tightening, central bank action will be key for markets again this week, with the Federal Reserve, Bank of Japan and Bank of England among those to announce rate decisions.
Markets are expecting rate hikes from the Fed and BOJ, while the BoE is set to leave policy unchanged.
"Rate hike vibes are spreading to the U.S.," Rainer Guntermann, rates strategist at Commerzbank, said, noting that Fed Chairman Kevin Warsh "would face credibility issues if he would not walk his recent hawkish talk".
Beyond the interest rate decisions, traders are also keen to gather clues about what might lie ahead for interest rates and the economy, especially as energy prices have been climbing again.
Brent crude futures LCOc1 were last up 2.6% at $107.28 a barrel as supply concerns grew following attacks around some of the Middle East's key oil transit routes.
Diplomatic efforts to resolve the conflict in the region meanwhile seemed to falter as a meeting between Iran and other Gulf powers was postponed.
Several ECB policymakers on Monday flagged concerns about higher energy prices, pointing not only to oil prices but also to gas and other indicators. Benchmark Dutch and British wholesale gas prices hit their highest intraday levels since late 2022 on Monday.
ECB policymaker Martins Kazaks told Reuters that there may be scope for more incremental hikes as energy prices and broader inflation stay elevated.
"The case is building up for more tightening," he said, but noted that the central bank could afford to move without rushing.
The yield on the German 2-year government bond DE2YT=RR, which is more sensitive to interest rate expectations, was last up 5.3 bps at 3.2271%, around its highest since late 2023.
The yield on Italian 2-year government bonds IT2YT=RR was 6.3 bps higher at 3.4565%.
Money markets were last pricing in at least one more interest rate hike from the ECB this year. Two more 25 basis-point hikes are fully priced in by February 2027, with a chance of further tightening later next year.
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