German Bond Yields Hold Near 3-Week Lows as Easing Oil Prices Cool ECB Rate Hike Bets

German government bond yields held steady near three-week lows on Thursday, as a recent retreat in crude oil prices prompted traders to scale back expectations for an aggressive series of interest rate hikes from the European Central Bank.

Yields Stabilize After Volatile July

The benchmark German 10-year Bund yield was flat at 3.10%, holding near its lowest level since July 15, according to market data. The more rate-sensitive two-year German yield also hovered near a three-week low at 2.71%.

This stabilization comes after a turbulent period for European debt. In July, the 10-year Bund yield surged to a 15-year high near 3.21% amid fears of escalating geopolitical conflict, sharp spikes in energy prices, and resilient Eurozone economic growth that fueled concerns about persistent inflation.

Shifting Rate Expectations

The key factor behind the recent calm in bond markets has been the drop in global oil prices, which the source material attributes to diplomatic efforts related to the Strait of Hormuz. This has eased some inflationary pressures, leading money markets to reduce bets on a rapid, multi-hike cycle from the ECB.

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However, expectations for further tightening have not disappeared. The market continues to price in an 88% probability of a 25-basis-point interest rate hike at the ECB's upcoming meeting on September 9, which would take the policy rate to 2.50%.

Economic Data Supports Further Tightening

Underpinning the case for at least one more rate increase this year is solid economic data from the Eurozone. Recent figures showed the bloc's economy expanded by 0.4% in the second quarter, while business activity in July reached an eight-month high.

Investors are now awaiting incoming U.S. labor market data for broader market direction, while closely monitoring upcoming European retail sales figures and inflation revisions to better gauge the ECB's policy path heading into the autumn.