German Bond Yields Hit 15-Year High as Oil Spikes Before ECB

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(Bloomberg) — German bond yields rose to the highest level since 2011 as surging energy prices and mounting inflation expectations fueled bets on interest-rate hikes ahead of the European Central Bank’s decision later Thursday. 

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German 10-year government borrowing costs climbed as much as three basis points higher at 3.21%. In the US, longer-dated peers are raising alarm bells following their longest run above 5% since 2007 amid signs that inflation will prove sticky. Traders are pricing almost two quarter-point hikes by the ECB by year-end while swaps imply a 75% chance that the Federal Reserve raises interest rates twice this year. 

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Despite the jump in crude prices, the ECB will probably keep its deposit rate on hold at 2.25% on Thursday, buying time to assess the fallout of the renewed fighting between the US and Iran. At the same time, a “surprise hike cannot be fully ruled out,” said Francesco Pesole, a strategist at ING Groep NV.

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“The re-escalation in the Middle East and European gas prices rising faster than oil prices should keep hawkish voices dominant in the governing council,” Pesole said.  

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Brent crude is approaching $100 a barrel and European gas prices closed at the highest since 2023 this week as the conflict between the US and Iran escalated this month. 

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What Bloomberg strategists say…

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European and UK rates have largely reverted to trading with crude. Correlation, of course, is not the same as beta. Front-end yields have proved relatively sticky as oil prices have eased, meaning the magnitude of moves has been smaller than during May’s rally. Even so, if oil continues to climb, the message from the correlations is clear: higher crude is once again a headwind for both bonds and equities.

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— Skylar Montgomery Koning, macro strategist. Click here for the analysis.

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The increased tensions have prompted warnings from policymakers.

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“The development of energy prices is a decisive factor in determining the future inflation outlook,” said the ECB’s Joachim Nagel in a statement last week. “Monetary policy will maintain its vigilant stance.”

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BlackRock Says Elevated Yields Offer Bond Investors a Cushion

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UK bonds have also come under pressure from the recent surge in oil prices, leaving 10-year yields at 5.07%, just below an 18-year peak reached in May. Traders are also betting the Bank of England will raise the benchmark rate twice to 4.25% by year end and a third time to 4.5% by the middle of next year. 

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