Eurozone government bond yields eased on Tuesday, bringing a brief pause to a selloff that has pushed borrowing costs to multi-year highs, as investors continued to assess the impact of strong economic growth and elevated energy prices on the global interest-rate outlook.
Germany's benchmark 10-year government bond yield was last down 2 basis points at 3.625%. Bond yields move inversely to prices.
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The benchmark euro zone 10-year yield was also heading lower for the first time in six sessions after climbing to 3.6526% on Monday, its highest level in 17 years.
Energy prices remain key inflation risk
The latest moves in euro zone bonds have been driven largely by oil and gas prices, which have raised concerns that an energy-led inflation shock could force the European Central Bank to keep tightening monetary policy.
Brent crude was trading above $107 a barrel on Tuesday as uncertainty over efforts to end the Iran conflict kept energy markets volatile. Rising oil prices have also contributed to a broader increase in global bond yields and expectations for higher interest rates.
ECB President Christine Lagarde said on Monday that a measured policy response remained appropriate because the recent inflation surge had not yet produced dangerous second-round effects. She also highlighted the risk that rising long-term bond yields could weigh on economic growth.
Eurozone inflation has already moved above 3% and could approach 4% by the end of the year, according to Reuters, increasing pressure on the ECB even as policymakers remain wary of the impact of tighter financial conditions on growth.
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Markets price further ECB hikes
Money markets were pricing almost four additional 25-basis-point ECB rate increases, on top of the two hikes delivered over the summer, according to the market pricing cited in the Reuters report.
However, expectations for the pace of tightening remain sensitive to incoming inflation and growth data. Economists widely expect the ECB to leave rates unchanged at its October 29 meeting and potentially consider another increase in December, when updated economic projections are available.
The ECB has previously pushed back against the idea that interest rates will automatically move in line with energy prices, stressing that policymakers also have to account for the impact of higher energy costs on consumption and economic growth.
German short-term yields easeGermany's two-year government bond yield, which is particularly sensitive to expectations for ECB policy rates, fell about 2 basis points to 3.281% on Tuesday.
The yield had reached a three-year high on Monday, reflecting the sharp repricing of near-term monetary policy expectations.
The retreat in German yields came as global bond markets also remained under pressure. In the United States, the 10-year Treasury yield rose above 5% and reached its highest level since 2007, while the 30-year yield climbed to its highest since 2004.
With energy prices elevated and inflation risks still tilted higher, euro zone bond investors remain focused on how far central banks may need to tighten policy, while also weighing the risk that higher borrowing costs could weaken economic activity.
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