FX.co ★ German Yields Surge on Rate Hike Expectations

Germany’s 10‑year Bund yield climbed above 3.1%, its highest level since May 21, as the conflict in the Middle East heightened fears that rising energy prices could stoke inflation and prolong elevated interest rates. The two‑year Bund yield, which is more closely tied to expectations for policy moves, also advanced to 2.8%, its highest since July 2024.

The moves came as the US military continued strikes against Iran following President Donald Trump’s decision to reinstate a blockade on Iranian shipping and propose a 20% fee for securing passage through the Strait of Hormuz, adding to uncertainty over global energy supply.

In response, markets increased their bets on further tightening by the European Central Bank. Money markets now price the ECB deposit rate at around 2.70% by December, up from the current 2.25%, and fully anticipate a rate hike in September.

In the US, Federal Reserve Governor Christopher Waller cautioned that the central bank may need to raise interest rates “in the near term” if inflation remains above its 2% target. Investors are awaiting remarks from Federal Reserve Chair Kevin Warsh, as well as the release of key US inflation data later today.