Eurozone bond yields scale new peaks as ECB decision looms

Eurozone government bond yields climbed to fresh multi-year highs on Wednesday, as traders positioned for the European Central Bank's (ECB) policy decision on Thursday. Market pricing now reflects expectations of two additional interest rate hikes by the end of 2026, with the deposit rate seen reaching 3.1% by late 2027.

The ECB, which raised rates in June, is widely expected to tighten policy again this week. However, economists remain divided on the trajectory beyond this move, with some pointing to headwinds from elevated energy costs and slowing growth.

Germany's 10-year Bund yield touched 3.44%, its highest level since 2011, while France's 10-year OAT yield hit an 18-year peak at 4.33%. Italy's 10-year yield also rose, nearing 4.29%. The moves were fueled by rising oil prices, with Brent crude above $100 a barrel, and European natural gas prices at a 3-1/2-year high. Concerns over drought-related food inflation and refinery costs added to the risk premium demanded by investors.

Citi analysts noted that a deposit rate above 2.5% would put ECB policy in "properly restrictive territory," but a stalemate between doves and hawks could mean no further hikes for the rest of the year. Franklin Templeton's David Zahn suggested the next move after Thursday might be a cut in late 2027, as higher bond yields and energy costs weigh on growth.

A poll of 65 economists indicated the ECB would hike on Thursday, potentially ending its shortest tightening campaign in 15 years. Mizuho's Evelyne Gomez-Liechti flagged the meeting as a potential "turnaround point" if ECB President Christine Lagarde avoids clear forward guidance.

Yields were also supported by the U.S. Treasury's announcement of a larger-than-usual bond buyback operation, adding to global pressure on fixed-income markets.