FX.co ★ European Bond Yields Hit Multi-Year Highs on Rate-Hike Bets

European government bond yields rose to new multi-year highs in the final trading session of August. Germany’s 10‑year Bund yield reached 3.3%, its highest level since May 2011. French 10‑year yields climbed to their highest since November 2008, Dutch yields touched 15‑year highs, and Italian and Spanish yields advanced to more than two‑ and three‑year highs, respectively. The move was driven by rising oil prices and increasingly hawkish signals from central banks, which reinforced expectations of further monetary tightening.

Brent crude gained after the United States reported it had struck an Iranian island in the Strait of Hormuz, while Tehran said it had responded by targeting US assets in the region. In interest-rate markets, investors now expect the European Central Bank’s deposit rate to be around 2.7% by December, implying roughly an 80% probability of a second rate increase following an anticipated hike as early as September. At the same time, Federal Reserve Chair Kevin Warsh cautioned that inflation has not slowed meaningfully and that the Fed still has “work to do,” leading markets to assign a 60% probability to a US rate hike in September.