Fed Rate Hike Odds Plummet as US Inflation Reports Soothe Global Bond Markets

Global bond markets breathed a sigh of relief as softer US inflation reports calmed fears of an imminent interest rate hike by the Federal Reserve. The Eurozone's benchmark government bond yield, Germany's 10-year Bund, dipped to 3.14%, while the two-year yield eased to 2.765%. This decline was triggered by the latest US inflation read, which saw consumer prices and producer prices come in lower than expected. As a result, traders reduced their implied odds of a Fed hike at its September meeting to around 35%, down from roughly 50% earlier in the week.

The impact on Eurozone yields is significant because global investors compare returns across countries, leading shifts in expected US policy rates to ripple into European long-term yields. Even though markets still price a close to 90% chance of the European Central Bank raising rates by a quarter point next month, this has a bigger influence on short-term yields. The result is a curve that can steepen or flatten, affecting euro interest-rate swaps and other long-duration assets.