German and US Bond Yield Gap Narrows
The difference between German and US 10-year borrowing costs remained close to its smallest level in a month on Thursday.
Euro zone bond yields moved higher as renewed fighting in the Gulf raised concerns about energy prices and inflation. Meanwhile, softer US inflation data helped limit the increase in Treasury yields.
Germany’s 10-Year Yield Reaches Two-Month High
Germany’s 10-year government bond yield rose by around 1 basis point to 3.13%.
The yield, which is widely used as the main benchmark for the euro zone bond market, climbed to its highest level since May 20.
It has increased by approximately 9 basis points this week and by 26 basis points since the beginning of July.
Gulf Conflict Fuels European Inflation Concerns
The recent rise in euro zone yields reflects growing fears about higher oil and natural gas prices.
Fighting between Iran and the United States in the Gulf has increased the risk of further disruption to global energy supplies. Europe is particularly vulnerable because it depends heavily on imported energy.
A prolonged increase in oil and gas prices could place additional upward pressure on inflation. It could also force the European Central Bank to raise interest rates more aggressively.
At the same time, higher energy costs may weaken economic growth by increasing expenses for consumers and businesses.
Markets Expect Further ECB Rate Hikes
Investors currently see around a 90% probability that the European Central Bank will increase interest rates by its September meeting.
Such a decision would represent the ECB’s second rate hike of the year following its June increase.
Markets also believe there is a meaningful chance that the central bank could deliver a third rate hike before the end of the year.
These expectations have contributed to the recent rise in German and other euro zone government bond yields.
US Treasury Yields Show a Smaller Increase
The US 10-year Treasury yield rose by around 2 basis points to 4.56%.
However, it remained broadly unchanged for the week and had gained only 14 basis points since the start of July.
The smaller increase reflects differences between the US and European economic outlooks.
The United States is less dependent on energy supplies from the Gulf than Europe. Therefore, rising oil and gas prices may have a smaller direct effect on the US economy.
Softer Inflation Reduces Fed Rate-Hike Expectations
Recent US inflation data has also placed limits on Treasury yields.
Both consumer and producer inflation figures came in below market forecasts this week. The softer readings reduced expectations that the Federal Reserve will raise interest rates in the immediate future.
As a result, traders have scaled back bets on near-term monetary policy tightening by the Fed.
German-US Yield Spread Falls to Monthly Low
The gap between German and US 10-year government bond yields stood at approximately 144 basis points.
That was close to its narrowest level since early June.
The spread had widened to around 157 basis points in late June. At that time, European government bonds were rising on expectations that oil and gas flows through the Strait of Hormuz would resume.
Meanwhile, investors believed that the Federal Reserve might need to increase interest rates soon.
The latest narrowing shows that euro zone yields are now rising faster than US Treasury yields as investors reassess inflation risks, energy prices, and the outlook for central bank policy.
