Euro Zone Yields Hit Multi-Year Highs Amid Inflation Fears

European government bond yields reached multi-year highs on Tuesday as inflation data solidified expectations of a European Central Bank interest rate hike in September. The German 10-year yield, a benchmark for the euro zone, hit its highest level since 2007 at 3.36% and was last up by 1 basis point at 3.33%. This marks a significant increase from Monday's 5 basis points rise.

The 30-year German bond yield reached its highest level since 2011 at 3.8458% and dipped slightly to 3.80%. The surge in yields is not isolated to Europe, with similar trends observed globally as the U.S.-Israeli conflict on Iran drives up energy costs worldwide. This, in turn, puts pressure on central banks to increase interest rates.

Japan's 10-year yield reached 3% for the first time in 30 years on Tuesday. Inflation data from Europe revealed a 3.3% increase in August, largely driven by higher energy costs due to rising crude oil and natural gas prices. However, underlying price pressures remained modest, providing some reassurance to policymakers that the current inflation surge is not yet causing second-round effects.

Bert Colijn, chief economist for the Netherlands at ING, noted that the jump in headline inflation makes a September rate hike 'easier to sell' for the European Central Bank. However, the benign core inflation rate may lead to further debate about future interest rate hikes.