Germany’s 10-year Bund yield inched up to 3.26% as investors shifted their attention back to mounting expectations of December interest rate hikes by both the Federal Reserve and the European Central Bank. This hawkish outlook outweighed downward pressure on yields from declining oil prices, which eased after US President Donald Trump downplayed the likelihood of further strikes on Iran.
European bond markets had initially rallied last week, after the Democrats’ strong performance in the US midterm elections fueled expectations of political gridlock and, in turn, more restrained fiscal spending. That move reversed on Friday as stronger-than-expected US employment data for October pushed the implied probability of a December Fed rate hike to 81%.
While expectations for an ECB rate increase remain more muted at 66%, reflecting the Eurozone’s weaker growth prospects, European bonds are still exposed to several regional risks. These include persistent political and fiscal uncertainties in France, as well as concerns surrounding the ECB’s upcoming leadership transition following President Christine Lagarde’s announcement of her intention to step down ahead of schedule.
