Germany’s 10-year Bund yield rose to 3.49% following an increase in US Treasury yields. The shift came after the latest US inflation data showed consumer prices and core inflation rising more than expected in September. This heightened the likelihood of a Federal Reserve rate hike this month, with markets now pricing in around a 50% chance of such a move.
The updated outlook reflects a notable shift from earlier expectations, where the probability of a rate hike stood at roughly 22% before the inflation report. Meanwhile, European Central Bank (ECB) President Christine Lagarde noted that elevated energy-driven inflation has yet to spread across the broader euro-area economy, suggesting a cautious approach to further rate adjustments.
However, the persistent inflation surprises and geopolitical tensions, particularly the US-Iran conflict, have prompted markets to anticipate another ECB rate hike in December. Bond markets have shown signs of stabilization after a global sell-off in late September and early October, but concerns over energy prices, inflation, and rising borrowing costs continue to weigh on sentiment.
Fiscal pressures in more heavily indebted countries add to the challenges, as investors remain cautious about the economic outlook. The evolving situation underscores the delicate balance between managing inflation and supporting economic growth in the euro area.