Global Market: Eurozone bond yields edge higher after Fed rate hike

Short-dated eurozone government bond yields edged higher on Thursday, a day after the U.S. Federal Reserve raised interest rates and signalled that further increases could be needed to bring inflation under control, according to a report by Reuters.

The Fed increased its benchmark overnight interest rate by 25 basis points to a range of 3.75%-4%, marking its first rate hike in three years. Its latest projections indicated that a majority of policymakers expect at least one more increase by the end of the year.

The Federal Reserve's policy decisions have a significant influence on global bond markets, given the size of the U.S. economy and the dollar's role in the international financial system.


Germany's 10-year government bond yield, the benchmark for the euro zone, was little changed at 3.51% on Thursday, remaining just below its 17-year high of 3.5723% reached on Tuesday, Reuters reported.

The impact was more pronounced at the shorter end of the German yield curve, which is more sensitive to expectations for monetary policy. The two-year German yield rose 1.5 basis points to 3.22%. Bond prices and yields move in opposite directions.

The U.S. two-year Treasury yield climbed to its highest level in more than two years following the Fed's decision, although it eased slightly to 4.692% on Thursday.

UniCredit's chief economist Marco Valli expects another Fed rate increase before the end of the year, most likely in December, while monetary policy could remain unchanged next year unless persistent energy price pressures prompt further tightening, Reuters reported.

Energy prices in focus
European investors were also monitoring elevated oil and gas prices, which have increased concerns that the European Central Bank may need to raise interest rates again.

Brent crude futures remained above $104 a barrel on Thursday, although prices were heading for a second consecutive daily decline.

Jefferies' chief European economist Mohit Kumar said the outlook for ECB policy would depend significantly on the path of oil prices. Persistent crude prices above $100 a barrel could increase the possibility of another rate hike in December and potentially further increases thereafter, while a sustained decline in oil prices could reduce the need for additional tightening, Reuters reported.

Financial markets are currently pricing in around a 40% probability of an ECB rate hike at its October meeting. They are also fully pricing in three quarter-point increases by June next year, according to market pricing cited by Reuters.