Euro yields push higher with crude near $100 and ECB hike imminent

Euro zone sovereign bond yields surged on Tuesday, with German borrowing costs nearing record highs as crude oil prices neared the $100-a-barrel mark. This surge reflects expectations of an imminent European Central Bank (ECB) interest rate increase. Germany's two-year policy-sensitive yield rose to 2.984%, nearing its highest level since 2024.

The 10-year German Bund yield remained steady at 3.382%, hovering near a 15-year high. The upward pressure on yields is due to the compounded impact of a severe energy shock and persistent ECB hawkishness as markets anticipate the ECB Governing Council meeting on Thursday. Brent crude surged towards $98 a barrel, rapidly approaching the $100 psychological milestone following threats from Iran to target Persian Gulf energy infrastructure.

Crossing triple digits could trigger cost-push stagflation, leading central banks to maintain restrictive interest rates even as economic growth slows. Initial August Eurozone inflation data revealed headline CPI accelerating to 3.3% year-on-year, primarily driven by a 14.3% surge in energy components. This suggests that with crude near $100, the ECB may keep a tight monetary policy into late autumn, which could dampen demand for short-duration paper.

After Thursday's ECB decision, European fixed-income desks will be watching Friday's U.S. Consumer Price Index (CPI) report for broader global direction. The release of last week's unexpectedly strong U.S. nonfarm payrolls report, which showed nonfarm employment expand by 162,000, has heightened expectations for a Federal Reserve rate hike at its September 15-16 meeting. This potentially could drive global sovereign benchmark yields even higher.