Euro Zone Bond Yields Edge Higher as Investors Weigh AfD Win, ECB Decision
German Bund yields rose as markets digested the AfD's state election victory and positioned for an expected ECB rate hike.
Euro zone borrowing costs inched higher on Monday, snapping a brief two-day respite, as investors weighed the implications of a far-right election win in Germany and braced for the European Central Bank's upcoming policy decision.
The yield on Germany's 10-year Bund, the benchmark for the region, rose 1.5 basis points to 3.35%. This follows a recent surge to 3.3951% last week, a level not seen since April 2011. Despite Friday's slight dip, yields have now risen for four consecutive weeks, driven by persistent energy costs and resilient economic activity that keep pressure on central banks to tighten policy.
The political landscape added a layer of caution after the Alternative for Germany (AfD) secured 44% of the vote in the Saxony-Anhalt state election, a stinging rebuke to Chancellor Friedrich Merz's conservative bloc. Analysts suggest the direct impact on bond markets may be limited, but the result could complicate governance. "If anything, it should be negative, given that the infighting within the federal government after the poor showing of the CDU and SPD will complicate the implementation of reform plans for the rest of the year," noted one strategist.
Attention now turns to the ECB, which is widely expected to raise interest rates on Thursday. The decision comes against the backdrop of the ongoing U.S.-Iran conflict, which continues to keep oil prices elevated and threatens to reignite inflation. Money markets are pricing in a roughly 90% chance of a second hike later this month, with the deposit rate projected to reach 2.72% by December. Futures also point towards a terminal policy rate of around 3% by late 2027.
In the periphery, Italy's 10-year yield rose 3.5 basis points to 4.18%, widening the risk premium over safer German debt to 80.5 basis points.