Global Market: German bond yields set for fourth weekly rise as investors bet on further ECB tightening

German government bond yields were on track for a fourth consecutive weekly rise on Friday, their biggest weekly increase since mid-July, as investors bet that central banks would keep monetary policy restrictive to contain persistent inflation pressures in a resilient economy, Reuters reported.

According to Reuters, Germany’s 10-year government bond yield rose 0.5 basis points to 3.36% and was on course for a weekly increase of 7.5 basis points. The two-year German bond yield climbed 1 basis point to 2.96%, putting it on track for a 7-basis-point weekly rise, its steepest since mid-July.

The rise in yields came as markets reassessed the outlook for inflation and interest rates across the euro zone. A survey cited by Reuters showed that growth in the bloc’s manufacturing sector accelerated to its fastest pace in more than four years in August, while inflation moved back above 3% as higher energy costs added to price pressures.


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Oil markets were also closely watched by investors. Reuters reported that crude prices were heading for their steepest weekly gain since mid-July as renewed U.S.-Iran hostilities heightened concerns over potential disruptions to oil supplies from the Middle East.

Iranian sources told Reuters that a U.S. campaign aimed at putting further pressure on Iran’s economy by restricting its oil exports and curbing sanctions evasion was becoming increasingly difficult for Tehran to withstand.

The developments have added to concerns about the inflationary impact of higher energy prices, reinforcing expectations that the European Central Bank may have to maintain a restrictive policy stance.

According to Reuters market data, traders were pricing the ECB’s deposit rate at around 2.73% by December, implying about a 90% probability of a second rate increase after September from the current 2.25%.

Markets were also pricing a policy rate of around 3% by September 2027, according to Reuters, compared with 3.1% on Wednesday. The shift reflected growing expectations that policymakers may need to keep interest rates higher for longer to contain inflation.

A Reuters poll showed that the ECB is expected to raise interest rates on September 10 for a second and final time in what would be its shortest rate-hiking campaign in 15 years.

Higher rate expectations have put upward pressure on government bond yields as investors adjust portfolios for a potentially more restrictive monetary-policy environment.

Elsewhere, Italy’s 10-year government bond yield was little changed at 4.18%, Reuters reported. The yield spread between Italian government bonds and benchmark German Bunds narrowed to 80 basis points from 81.7 basis points in the previous session.

The relatively narrow spread indicates that Italian debt markets have remained resilient even as investors have increased their expectations for tighter monetary policy across the euro zone.