European government bond yields climbed to fresh multi-year highs on Monday as rising oil prices and increasingly hawkish signals from major central banks reinforced expectations that interest rates could remain higher for longer.
Germany’s benchmark 10-year Bund yield climbed above 3.3%, reaching its highest level since May 2011. The two-year German yield, which is more sensitive to monetary-policy expectations, rose as high as about 2.91%, its strongest level since July 2024.
French Borrowing Costs Reach Highest Since 2008
The selloff extended across euro-area debt markets. France’s 10-year government bond yield rose to about 4.15%, its highest since November 2008, as investors also monitored the country’s fiscal outlook.
Yields in the Netherlands, Italy and Spain also traded at elevated levels as the repricing in global interest-rate expectations spread through European fixed-income markets.
The moves build on a broader increase in borrowing costs across Europe in recent weeks. Germany’s 10-year yield, for example, has risen from around 2.85% in late June to above 3.3% at the end of August.
Oil Adds to Inflation Concerns
Energy prices provided another catalyst for the bond selloff after renewed military escalation between the United States and Iran.
U.S. forces struck Iranian rocket launchers on Larak Island in the Strait of Hormuz on Sunday, marking the first known U.S. military action against Iranian forces in more than a month. Brent crude subsequently climbed above $90 a barrel, adding to concerns that higher energy costs could keep inflation elevated.
European bond markets have become particularly sensitive to energy prices because of their potential impact on inflation. Germany’s preliminary August data showed annual inflation accelerating to 2.9%, with energy prices rising 10.5% from a year earlier.
Markets Price Additional ECB Tightening
Expectations for further European Central Bank tightening have strengthened alongside the rise in energy prices.
Traders are pricing the ECB’s deposit rate at approximately 2.70% by December, implying about an 80% probability of a second rate increase after another move that is widely expected in September. The deposit rate currently stands at 2.25%.
The Bundesbank noted in its August report that the resurgence of conflict in the Middle East had already prompted investors to revise expectations for euro-area interest rates higher, reflecting assumptions that policy rates could remain elevated for longer.
Warsh Comments Add Pressure From U.S. Rates
The European moves also followed Federal Reserve Chair Kevin Warsh’s remarks at Jackson Hole, where he emphasized returning inflation to the Fed’s 2% target and left the door open to additional rate increases.
Market pricing for a September Fed rate increase rose sharply after the comments, with the probability moving above 60%. The repricing in U.S. rates has added pressure to global bond markets alongside renewed concerns over energy-driven inflation.
The combination of higher oil prices, persistent inflation and expectations for tighter monetary policy has pushed sovereign borrowing costs higher across several major economies, with Germany and France ending August with benchmark yields at levels not seen in more than 15 years
