German yields hit multi-year highs after Warsh’s hawkish tone

Euro zone government bond yields surged to multi-year highs on Monday, driven by Federal Reserve Chair Kevin Warsh's hawkish tone. Germany's two-year Schatz yield climbed to a record 2.898%, its highest level since July 2024, as traders reassessed short-term rate expectations across the Atlantic. The benchmark 10-year German Bund yield also reached 3.2903%, the highest since 2011.

This sharp increase in borrowing costs signals a global re-pricing of interest rates, as bond investors demand higher term premia to hold duration amid persistent inflation and high sovereign issuance. The European money markets reacted by raising the likelihood of a 25-basis-point U.S. rate hike in September to nearly 60%, compared to around 35% the previous week.

The hawkish stance of the U.S. Federal Reserve immediately impacted European debt markets, as demand for core European sovereign debt dwindled, pushing yields upward across all tenors. Trading desks are now assessing whether Warsh's hawkish comments will gain wider endorsement among Federal Reserve officials, with speeches by Fed Governors Michael Barr and Christopher Waller on Tuesday and Thursday likely to offer further insights before the key U.S. August employment data on Friday.

Meanwhile, the recent spike in energy prices and the upcoming release of Eurozone inflation data are expected to reinforce expectations for another 25-basis-point rate hike by the European Central Bank during its meeting on September 10.