Key facts
- Germany's 10-year bond yield rose 1 basis point to 3.13%, the highest since May 20.
- The gap between German and U.S. 10-year borrowing costs narrowed to 144 basis points.
- Markets see a 90% chance of an ECB rate hike by September.
- U.S. 10-year Treasury yields were flat on the week at 4.56%.
- Cooler U.S. inflation data has reduced expectations for Federal Reserve rate hikes.
Euro zone yields climbed on Thursday, with Germany's 10-year bond yield reaching its highest level since May 20, as renewed fighting in the Gulf sent oil and gas prices higher. This escalation has fueled concerns about rising inflation, potentially forcing the European Central Bank (ECB) to adopt a more aggressive rate-hiking stance.
Traders are pricing in approximately a 90% chance of an ECB rate increase by its September meeting, which would be the second this year, and see a good possibility of a third hike by year-end. The benchmark German yield has risen 9 basis points this week and 26 basis points in July so far.
In contrast, the 10-year U.S. Treasury yield remained flat on the week at 4.56%. Cooler-than-expected consumer and producer inflation data in the United States has led traders to scale back bets on imminent Federal Reserve rate hikes. The U.S. is also less exposed to energy from the Gulf compared to Europe.
The spread between German and U.S. 10-year borrowing costs narrowed to 144 basis points, near its lowest point since early June. This gap had widened to 157 basis points in late June when European government bonds were rallying amid signs of oil and gas resuming flow through the Strait of Hormuz and expectations of Fed rate hikes.