Bund yields at 15-year high, traders price in three ECB hikes by September

By Stefano Rebaudo

March 27 (Reuters) - Euro zone benchmark Bund yields hit their highest in 15 years on Friday, climbing above 3% as money markets priced in three European Central Bank rate hikes, as there was little concrete sign of progress toward a truce in the Middle East.

U.S. President Donald Trump gave Iran another 10 days to reopen the Strait of Hormuz or face the destruction of its energy plants.

Markets have increased bets on ECB tightening since the start of the Iran war on February 28, anticipating a rapid central bank response to oil-driven inflation pressures.

ECB President Christine Lagarde's warning that energy disruptions could last for years added pressure on long-dated bonds and reinforced expectations of higher rates for longer.

Expectations for a swift return to normal may be overly optimistic, she said on Thursday.

Traders on Friday priced in an ECB deposit facility rate at 2.70% by September EURESTECBM4X5=ICAP and a 60% chance of a first rate hike by May EURESTECBM4X5=ICAP. The depo rate is currently 2% and the ECB meets next at the end of April.

"We think the ECB, like us, is expecting an initial inflation wave, starting with gasoline prices, followed by knock-on effects on transportation costs, food prices and other industrial products," said Carsten Brzeski, head of macro strategy at ING.

"As long as this remains a single, time-limited wave, there is no need for ECB rate hikes."

German 10-year Bund yields DE10YT=RR, the euro zone benchmark, were up 4 bps at 3.10% after hitting 3.13%, their highest since May 2011. They were set to end March 45 bps higher, the biggest monthly rise since December 2022.

"The ECB  might hike rates more than just twice and it might also consider rate steps of 50 bps," said Reinhard Cluse, chief European economist at UBS, referring to a "severe scenario" with inflation rising up to around 6% in the coming months.

UBS now expects rate hikes in June and September, taking the depo rate to 2.5%.

German two-year yields DE2YT=RR have also surged, up 67 bps this month, the most since August 2022. They were last down 3 bps on the day at 2.68%, after hitting 2.771%, their highest since July 2024.

Weak demand at recent government bond sales has added to pressure. Treasury and Bund auctions have drawn far fewer bids than prior months. The last 10-year Bund auction on March 11 saw the poorest demand since October, which itself was the weakest in several years.

FRENCH YIELDS AT HIGHEST SINCE 2009

Long-dated French bonds have been among the hardest hit given France's reliance on energy imports and its more fragile public finances.

Debt-heavy countries face the most strain in a higher-for-longer rate environment, which would push up debt servicing costs.

French 10-year OAT yields FR10YT=RR hit their highest since June 2009 at 3.889%, and they were last up 5 bps at 3.84%. France's 30-year bond yields FR30YT=RR also hit a 17-year high at 4.628%.

Italy's 10-year yield IT10YT=RR rose 6 bps to 4.06%, up 10 bps. It touched 4.1420 earlier, the highest since July 2024. The gap between Italian and German 10-year yields DE10IT10=RR stood not far from a nine-month high at 95 bps, after hitting 100 bps early in the session.