German government bond yields close to multi-year highs

By Stefano Rebaudo

May 13 (Reuters) - German government bond yields hovered around their multi-year highs on Wednesday as markets expected the European Central Bank to raise rates by 75 basis points by year-end to counter inflation driven by the energy shock.

Hopes for a lasting peace deal in the Middle East dwindled and Tehran tightened its grip over the Strait of Hormuz. Ahead of a high-stakes summit in Beijing, U.S. President Donald Trump said he did not think he would need to enlist Chinese President Xi Jinping to resolve the conflict.

A surge in oil prices following the outbreak of the Iran war on February 28 heightened inflation concerns and reinforced expectations of ECB rate hikes, driving borrowing costs higher across Europe.

Germany’s 2-year yields DE2YT=RR, more sensitive to expectations for policy rates, fell 0.5 basis points to 2.70% on Wednesday. They reached 2.771% in late March, the highest since July 2024.

Oil prices fell slightly on Wednesday, snapping a three-day rally.

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, was flat at 3.10%. It reached 3.13% in late March, its highest level since June 2011.

Money markets priced in an ECB deposit facility rate at about 2.75% by the end of the year EURESTECBM5X6=ICAP from the current 2% while indicating a 90% chance of a first move next month.

Italy’s 10-year government bond yields IT10YT=RR dropped 1.5 bps to 3.83%.

The yield gap of Italian government bonds versus bunds DE10IT10=RR dropped to 73.5 bps. It was at 63 bps before the attack on Iran and hit 103.62 in late March, the highest level since June 2025.