German Yield Hits 17-Year High as Traders Up ECB Hike Bets

Germany's 10-year yield surged to a 17-year high, rising six basis points to 3.50%, as European Central Bank President Christine Lagarde flagged risks to inflation. This move comes as investors worry about elevated energy prices, which have sparked a selloff in European bonds. The two-year rate climbed as high as 14 basis points to 3.21%, the highest in almost three years. Traders are now fully pricing three more quarter-point interest-rate hikes by the middle of next year, with a more than 70% chance of a move next month. Macro investment strategist Patrick Ernst says another rate hike before year-end is no longer a tail risk. The ECB warns that inflation is set to remain above its 2% target for an extended period due to ongoing conflict in the Middle East and Russia's war in Ukraine. Energy costs are expected to feed through to core and food-price inflation. The selloff in European bonds took the additional yield on French 10-year bonds over their German counterparts to 91 basis points, the highest on an intraday basis since 2012. French borrowing costs have been under pressure as investors become increasingly wary of the nation's budget deficit and uncertain political outlook. UK bonds also fell, with two-year yields up 16 basis points at 4.86% and 30-year yields at 5.93%, the highest since 1998. The Bank of England is now expected to hike interest rates by 110 basis points by the end of next year, from 89 basis points on Wednesday. Lagarde said the rise in bond yields is not a euro-specific issue and that the central bank is watching moves at the long-end of the curve closely. She pointed to multiple causes, including the rise in AI-debt issuance. Analyst Ed Hutchings says the market is right in thinking more hikes will be coming, but notes that the value of European bonds may have gone too far.