German government bond yields rose by the most in decades during August, reflecting hot inflation data and higher interest rates.
The yield on two-year bonds issued by Europe’s largest economy rose by 85 basis points this month. This is set to be the biggest monthly move higher since 1981, according to Refinitiv data.
Meanwhile, the benchmark 10-year bond yield rose more than 65 basis points, the highest monthly increase since 1990.
The two-year yield on German Bunds was 1.117% at 8AM ET Wednesday, up two basis points from the day before. The 10-year yield rose one basis point to 1.522%.
French bond yields also rose, with the two-year yield rising to a level last seen in 2011 and the 10-year yield rising to a level last seen in 2013.
Flash numbers released Wednesday morning showed Eurozone inflation hit a new record high of 9.1% in Augustsupported by rising energy costs and rising food, alcohol and tobacco prices.
Higher interest rates tend to make bonds less attractive and lower their prices, which moves inversely in yields.
“European bonds are largely tracking developments in the energy markets,” Antoine Bouvet, chief price analyst at Dutch bank ING bank, told CNBC by email.
“With energy bills soaring across Europe, bond markets are concluding that the ECB will have to make sharper hikes this cycle.”
This was condensed by Hard-line statements made by Federal Reserve officials Added in Jackson Hole Symposium.
After the inflation data was released, analysts at Pantheon Macroeconomics said they now expect the European Central Bank to raise its deposit rate by 50 basis points three more times before the end of the year.
The bank raised interest rates by 50 basis points last month.
However, the ING economics team expects that a 50 basis point rise by the European Central Bank next week will be followed by a 25 basis point increase in October, followed by a longer pause until spring.
This is because it may be “easier said than done” for the ECB to follow the Fed’s lead in seeing recession as an acceptable cost of tackling inflation, said Carsten Brzeski, global head of macroeconomic research. “If we’re right, bond yields should start dropping again,” Brzeski said.
ING’s Buffett added that the outlook for bonds largely depends on how energy is traded in the coming weeks as the market focuses on inflation trends.
“There will come a time this winter when the effects of growth are hurting inward and we expect bond yields to decline,” he said.
“This will further underperform riskier assets, boost safe-haven demand for government bonds, and also prompt markets to question their assumptions regarding central bank hikes.”
The team expects 10-year bond yields to trade at 1% in the first quarter of 2023, down from current levels of 1.5%.
Meanwhile, yields on British 10-year bonds are set to post their biggest rise since May 1994 this month, Reuters reported. The 10-year gold yield rose 8 basis points to 2.793% at 8 AM ET, up from 1.72% at the beginning of August.
In the United States, the yield on two-year Treasury bonds is It reached its highest level in 15 years.