Global Market: German bond yields rise as investors weigh inflation risks and ECB rate path

German short-dated government bond yields were on track to finish the week higher on Friday as investors remained focused on persistent inflation risks and the potential path of European interest rates, Reuters reported.

Germany's two-year government bond yield rose 2 basis points to 2.86%, putting it on course for a weekly increase of about 4 basis points. The move came even as oil prices declined on Friday and were headed for their first weekly fall in three weeks.

Oil prices were pressured by a report that US President Donald Trump was not interested in returning to previous deal terms with Iran, easing some concerns over potential disruptions to crude supplies.

Markets price higher ECB rates

Despite the decline in oil prices, bond investors continued to price a relatively firm interest-rate outlook for the European Central Bank, reflecting concerns that inflation could remain persistent.

Markets were pricing the ECB deposit rate at around 2.80% by March next year, compared with its current 2.25% level. By late 2027, the deposit rate was seen at around 2.90%, with pricing implying roughly a 60% probability that the ECB could eventually raise rates to 3%.

The rate expectations have kept pressure on short-dated German bonds, which are particularly sensitive to changes in monetary policy.

Longer-dated German yields also edge higher

Germany's 10-year government bond yield rose 2 basis points to 3.27% on Friday and was set to finish the week around 1.5 basis points higher.

The modest increase reflected continued caution among investors as markets assessed the outlook for inflation, monetary policy and global interest rates.

Attention was also turning to Federal Reserve Chair Kevin Warsh's first speech at the Jackson Hole Economic Policy Symposium, scheduled for 1400 GMT. Investors were looking for signals on the US economic outlook and the future direction of Federal Reserve policy.

French and Italian spreads remain in focus

Peripheral bond markets also remained under scrutiny. The spread between Italian government bonds and German Bunds stood at 82 basis points.

France's 10-year bond spread over Germany was wider at 85.5 basis points. It had reached 86.60 basis points on Monday, its highest level since November 2024.

French government bonds have faced additional pressure as investors assess the country's difficult fiscal outlook and the political challenges surrounding its annual budget. Reuters noted that France faces a particularly challenging budget battle in the coming months.

Overall, European bond markets remained cautious, with investors balancing falling oil prices against concerns that inflation could prove more persistent than previously expected, potentially limiting the scope for monetary easing and raising the prospect of higher interest rates further ahead.

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