As well as the energy shock, the rise in yields has also been driven by "a hawkish tone by central banks, which aim to counter a reacceleration in inflationary pressure, still-solid economic figures, an increase in fiscal spending, sustained private investment (especially in AI) and higher macroeconomic and geopolitical uncertainty," said Francesco Maria Di Bella, FI strategist at UniCredit.
"We expect these headwinds to continue to weigh on Bund prices in the near term, and we cannot rule out that the 10Y Bund yield could even reach 3.5%, especially in the case of fresh geopolitical tensions," he added.
ECB rate expectations and outlook
Germany's 2-year government bond yield, which is more sensitive to interest rate expectations, rose above 3% for the first time since 2024. It was last 5.5 bps higher on the day to 3.0009%.
Money markets were pricing a near 100% probability of the European Central Bank hiking interest rates when it meets later this month, with a strong chance of a further hike by year-end.
ING's Carsten Brzeski said the ECB's second rate hike this year could be seen as an "insurance" move aimed at reinforcing the bank's credibility and preventing broader inflationary effects from higher energy prices.
However, he said, "as long as inflation remains mainly energy-driven, hiking rates further beyond next week would not make a lot of sense and could harm the euro zone economy."
Euro zone bond yields extend selloff
Euro zone bond yields rose for the sixth consecutive session on Wednesday, with the global bond market rout showing no signs of abating as fresh escalations in the Middle East pushed oil prices higher again, adding to inflation fears.
Germany's 10-year government bond yield, the benchmark for the euro zone, hit its highest level since April 2011. It was last up 4.7 basis points on the day to 3.3851%.
Wednesday's selloff in government bonds extended a global rout that is raising borrowing costs to multi-decade highs as the Middle East conflict pushes up energy prices, playing into investor fears about inflation and ballooning government debt.
Inflation worries intensify after Middle East escalation
Inflation worries were amplified again on Wednesday as Iran and its Arab neighbours were plunged back into war by the biggest exchange of fire between Tehran and Washington since July, with U.S. forces striking Iran's southern coast and Iran firing at American bases across the region.
The fresh escalations sent energy prices higher, with Brent crude futures climbing to more than one-month highs earlier in the session. They were last a touch higher on the day to $95.07 a barrel.
Data on Tuesday showed that euro zone inflation accelerated to 3.3% in August from 2.9% in July, driven almost entirely by higher energy costs as crude oil and natural gas prices both rose, and refiners bumped up their margins.
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