Germany Government Bond 10Y

BNY's Geoff Yu highlights that European Central Bank Executive Board member Isabel Schnabel sees further rate hikes as necessary, with Euro area inflation risks still tilted to the upside and growth more resilient than expected. This hawkish stance from the ECB provides support for the Euro against the US Dollar, as the market anticipates continued monetary tightening from the central bank.

European Central Bank (ECB) Executive Board member Isabel Schnabel said in an interview with Bloomberg News published on the 26th that interest rates need to be raised further, as the prolonged Middle East conflict and the resilience of the euro zone economy pose upside risks to inflation. She stated, "At the current level of policy rates, it is unlikely that inflation will return to target in the medium term, so further tightening will be necessary."

The European Central Bank (ECB) plans to raise interest rates at its September meeting to address economic pressures from the Iran war, with the policy rate expected to increase to 2.50% from 2.25%. This follows the first rate hike in nearly three years in June, aimed at preventing soaring energy prices from spilling over into other parts of the economy. The rate increase has been reflected in the ECB's economic projections since June, with policymakers viewing it as necessary to avoid a repeat of the severe inflation seen after Russia's invasion of Ukraine in 2022. Key drivers of inflation include surging natural gas prices and persistently high fuel prices at the pump. With inflation near 3% and the conflict in Iran ongoing, coupled with a still-strong eurozone economy, the ECB's Governing Council deemed it necessary and appropriate to raise rates again. However, the ECB has not signaled further hikes beyond the September meeting.

A global bond selloff that pushed yields to two-decade highs has made government debt the main concern on Wall Street, overshadowing the AI boom. Yields surged in the U.S., U.K., France, Germany, and Japan as investors lost patience with persistent deficits and heavy government borrowing. The Treasury Department announced increased buybacks of long-dated bonds, but yields resumed their climb as investors doubted the move would stem the tide. Economists including RSM's Joseph Brusuelas and Capital Economics analysts said markets are now demanding higher term premiums for fiscal, geopolitical, and policy uncertainty, and warned that continued populist spending and tax cuts could eventually trigger banking or currency crises.

S&P Global reported on the 21st that the flash eurozone composite purchasing managers' index for August came in at 52.1, up from 52.0 in July and the highest since last November. It also beat the Reuters consensus forecast of 51.7, with new orders growing at the fastest pace in 40 months and export orders, including those within the eurozone, rising for the first time since February 2022, when Russia invaded Ukraine. The manufacturing PMI rose to 52.8 from 51.9, the highest in more than four years, and output growth reached its strongest in 54 months, while the services PMI was unchanged at 51.7. Employment increased for the first time this year, with manufacturing resuming hiring after more than three years and services posting the fastest growth in eight months. Price pressures remained elevated but were easing, with input cost growth at a six-month low and output price inflation slowing to a five-month low. Chris Williamson, chief business economist at S&P Global Market Intelligence, said that given solid business sentiment, a recovering labour market and sticky inflation, the European Central Bank is likely to maintain a hawkish bias and cannot rule out a rate hike in the near term.

Bond markets around the world are facing one of the largest selloffs of long-term government bonds in history, pushing yields sharply higher and driving long-term borrowing costs for governments and the private sector to their highest levels in a decade. In the United States, the yield on the 30-year Treasury bond climbed to 5.32 percent, its highest level since mid-2007, while French government borrowing costs surged to 4.87 percent, the highest since 2008. German and UK government bonds also hit multi-year highs, and Japan saw yields rise close to 4.07 percent. The main factors driving this crisis include geopolitical risks that are pushing energy prices higher, persistent inflation that is forcing central banks to keep interest rates elevated for longer, and concerns about fiscal discipline among governments that are issuing large amounts of debt. At the same time, the structure of global bond holders is changing, as pension funds and the public sector reduce their holdings of long-term bonds and shift more into equity markets. This leaves the market more reliant on price-sensitive private investors, raising the risk premium for holding long-term bonds, and the higher interest burden will be passed on to businesses and households through more expensive borrowing costs.

Global bond yields have reached levels last seen in July 2008, before Bitcoin existed, and the cryptocurrency is not benefiting. A Bloomberg gauge of long-dated government debt hit its highest yield since July 2008 in May, while Bitcoin has fallen 46% over the past year compared with gold's 32% rise. UK 10-year gilts pay 5.05%, Germany sits at 3.21%, and Japan pays 2.88% after decades near zero. The US 10-year real yield reached 2.41% on August 14, meaning investors can now beat inflation with government debt and take almost no risk, while Bitcoin pays nothing. Barclays strategist Patrick Coffey attributed the move to fiscal realities, persistent inflation risks, and political uncertainty.

European stocks edged higher on the 10th, with the STOXX Europe 600 index closing at a record high for the fifth consecutive trading day. Meanwhile, in eurozone bond markets, yields rose against a backdrop of higher oil prices, and financial markets are pricing in the view that the ECB's deposit rate will climb from the current 2.25% to around 2.7% by year-end, and be raised further to about 2.8% by March 2027. Crude oil futures gained after Iran stated that the reopening of the Strait of Hormuz requires the US to meet conditions including compensation, lifting the oil and gas sector index. The London stock market fell back, with the FTSE 100 slightly lower and the mid-cap FTSE 250 index down 0.44%. Eurozone employment data and US CPI figures are due later this week, and are in focus for clues on the interest rate outlook.

The European Central Bank decided on the 11th to raise its policy rate by 0.25%. This is the first rate hike in two years and nine months, since September 2023. The euro-dollar pair recovered to 1.2081 dollars in January 2026, and the euro-yen pair was bought up to 187.70 yen on April 15, 2026. However, the Bank of Japan decided at its June monetary policy meeting to raise rates from 0.75% to 1.0%, which could somewhat restrain risk-seeking euro buying and yen selling.