FX.co ★ German Bund Yields Hold Near 17-Year High

Germany’s 10-year Bund yield held above 3.6%, hovering near its highest level since June 2009, as investors weighed ECB President Christine Lagarde’s recent comments against flash inflation figures and persistently high oil prices. Lagarde indicated that the latest spike in inflation has not yet led to substantial second-round effects across the euro area, implying that a measured, rather than aggressive, policy response remains appropriate.

With eurozone inflation already above 3% and potentially approaching 4% by year-end, markets are now pricing in as many as four additional rate increases over the coming year, on top of the two hikes delivered over the summer. Most economists expect the ECB to leave rates unchanged at its October 29 meeting and to resume tightening in December, when updated economic projections will be released.

In the wider euro area, Spain’s EU-harmonized inflation rate climbed to 5% in September, its highest level in three years and well above the ECB’s 2% target. At the same time, Brent crude prices remained elevated amid stalled negotiations over reopening the Strait of Hormuz, adding further upward pressure on inflation expectations.