Europe's Bond Sell-Off Fuels Mortgage Rate Hikes

Rising bond yields are causing mortgage rates to increase in several European countries, affecting households' borrowing costs and governments' spending power.

In Germany, where mortgage rates track Bund yields closely, a seven-basis-point rise is expected over the next week. In Italy, traditionally fixed-rate mortgages follow euro interest-rate swaps more closely than government bond yields, but Italian 10-year bond yields have risen to 4.08% from 3.86% in early August.

According to Robert Timper of BCA's chief fixed income strategist, the monetary policy outlook is the main driver of government and private-sector borrowing costs. He notes that European bond yields are highly sensitive to energy prices, particularly natural gas, which has more than doubled this year.

The sell-off in Europe's bond markets was triggered by fading hopes for a swift resolution to the Iran conflict, pushing oil prices and inflation expectations higher. This has led to increased borrowing costs for governments, which will eventually filter through to households. Existing bonds' debt-servicing costs are expected to rise as well.