Bund Yields Tick Up Amid AfD Show and ECB Anticipation

Germany's government bond yields rose slightly as investors weighed the impact of the Alternative for Germany (AfD) party's strong showing in Saxony-Anhalt and looked ahead to the European Central Bank's rate decision on Thursday.

The 10-year Bund yield increased to 3.35%, while the 2-year yield rose to 2.95%. According to Commerzbank, one of Germany's largest banks, the AfD's performance could be a small negative if it leads to federal infighting and slows reforms, but the direct impact on Bunds should be limited.

The bigger force driving market movements is the European Central Bank, with money markets pricing in a deposit rate of 2.72% by December, up from 2.25% now, and around 3.01% by September 2027. This suggests that traders expect more tightening soon, but not a much higher 'peak rate' later.

As a result, investors are focusing on the 2-year vs 10-year Bund gap, which will be Thursday's key pressure point. A steepening or inverting of this curve could signal how confident markets are that the ECB can continue hiking without choking off growth.