German Bund yields hit 17-year high as energy fears grip bond markets

Germany's 10-year Bund yield climbed above 3.5% on Monday, reaching its highest level since June 2009, as surging energy prices and persistent inflation fears triggered a broad selloff in European government bonds. The move came after the yield rose more than 16 basis points last week, its largest weekly increase since early March.tradingview+1

The selloff extends well beyond Germany. UK 30-year gilt yields rose to their highest since 1998 on Monday, while 10-year borrowing costs reached levels not seen since 2007, according to LSEG data reported by Morningstar's Dow Jones. Two-year gilt yields also jumped around 13 basis points to their highest since 2023.morningstar

Energy Prices at the Center

Oil prices remain well above $100 a barrel as tensions around the Strait of Hormuz have intensified following Houthi strikes on Saudi Arabia and Iranian attacks on Gulf shipping. European natural gas prices have also surged, with Dutch TTF futures hitting their highest level since 2022, according to CNBC, as European nations scramble to fill storage ahead of winter after hesitating over the summer in hopes the Iran conflict would subside.wincountry+2

The European Central Bank raised its deposit rate by 25 basis points to 2.5% on September 10, its second hike of 2026. ECB Governing Council member Peter Kazimir said Monday in a blog post that his attention had shifted from oil to gas and electricity prices. "Inflation risks are clearly tilted to the upside," Kazimir wrote, adding that "the energy shock has already lasted longer than many expected". Bundesbank President Joachim Nagel told CNBC last week that further rate decisions were "very much dependent on how the energy prices evolve".cnbc+3

Central Bank Week Ahead

Attention now turns to a packed schedule of central bank decisions. The Federal Reserve is set to announce its policy decision on Wednesday, followed by the Bank of England on Thursday and the Bank of Japan on Friday. Markets fully price in a 25-basis-point BoJ rate hike that would bring Japan's policy rate to 1.25%, a level last seen in 1995. The Bank of England is expected to hold rates, though the vote is likely to be close amid the same energy-driven inflation pressures weighing on gilts.tmgm+1

What Comes Next

Financial markets see roughly a 60% chance of another ECB rate hike at the October 29 meeting, with a move by year-end fully priced in. Kazimir warned that the full consequences of the prolonged energy shock "have not yet passed through to the economy," while a combination of European drought, El Niño, and rising diesel and fertilizer costs threatens to push food prices higher in the months ahead.wincountry