Germany’s 10-year Bund yield declined to 3.45%, pulling back from last week’s 17-year highs, as renewed volatility in bond markets led investors to scale back expectations for additional ECB rate hikes. Markets now imply an 80% probability of one more rate increase by year-end. While investors had previously anticipated at least three further hikes by March 2027, they are currently fully pricing in only one additional move, with roughly an 80% likelihood of a second.
ECB Chief Economist Philip Lane noted on Monday that the recent rise in borrowing costs could dampen economic activity by weakening demand, potentially limiting the amount of further policy tightening required to contain inflation.
At the same time, the France–Germany 10-year yield spread continued to narrow as investors reassessed whether the recent spike in France’s risk premium had been excessive. In Spain, Prime Minister Pedro Sánchez called a snap election for November 29 following protests over surging housing costs.
