German Yields Hit Multi-Year Highs as Warsh Signals Rate Hikes

German government bond yields have reached their highest levels in years after Federal Reserve Chair Kevin Warsh signaled that interest rates may need to rise if inflation remains above target. Brent crude futures are also up, with prices climbing 0.5% to $89.80 due to the US's attack on an Iranian island and Tehran's response.

The UAE has denied reports of missile strikes on its Al Minhad Air Base. German two-year bond yields have reached 2.9014%, their highest since July 2024, while U.S. two-year Treasury yields jumped after Warsh's comments. The yield curve flattened on Friday, but was down 2.5 basis points in early London trade on Monday.

Commerzbank rate strategist Rainer Guntermann said that Bunds cannot defy US Treasuries headwinds, but should still outperform as the market is well-prepared for the next ECB rate hike. Markets are pricing the European Central Bank's deposit rate at about 2.70% by December, implying an 80% chance of a second rate hike after one widely expected in September.

Investors are positioning for rates to move closer to 3% by late 2027, with the deposit rate priced at 2.94% by September 2027. Germany's 10-year bond yield is up 1 bp to 3.28%, its highest since May 2011. UBS Global Wealth Management's Mark Haefele said that their base case remains steady progress in underlying inflation allowing the Fed to keep rates unchanged this year.