ECB holds rates steady as bond yields surge 4 bps on hike bets

The ECB held rates unchanged Thursday, yet bond yields surged across Europe as traders priced in a September hike and rising oil complicated the inflation outlook.

The European Central Bank kept its key rate unchanged Thursday, but a synchronized selloff in sovereign bonds pushed Germany's 2-year yield up 4.3 basis points to 2.885%, reflecting growing bets on a September rate hike.

The move extended across the euro area. France's 10-year yield rose 4.8 basis points to 4.017%, Italy's climbed 5.7 basis points to 4.049%, and Spain's added 4.2 basis points to 3.674%. Greece's 10-year yield gained 4.8 basis points to 3.948%, Tradeweb data show. The broad-based nature of the selloff — affecting both core and peripheral debt — suggests the repricing is macro-driven rather than idiosyncratic to any single country.

European equities also declined, with Germany's DAX falling 0.66% and France's CAC 40 dropping 0.89%, while London's FTSE 100 held relatively steady at minus 0.08%. The euro weakened 0.32% against the dollar to $1.14. France's overall business climate improved to 97 in July, with its manufacturing index edging up to 101, according to the national statistics office.

The ECB's next policy meeting on Sept. 10 now carries heightened significance. Rising oil prices — which add to imported inflation — give the Governing Council cover to resume tightening after the July pause, even as the euro-area economy shows signs of slowing. Traders see a September rate increase as increasingly likely, according to market pricing.

The 2-year German yield traded within a 5.2-basis-point range on Thursday, oscillating between 2.854% and 2.906%, before settling at 2.885%. The yield dipped about 2 basis points immediately after the ECB's 2:15 p.m. Frankfurt time announcement before reversing higher, indicating the market viewed the hold as temporary rather than the end of the tightening cycle.

The 2-year to 10-year German yield spread narrowed 1.1 basis points to 31.6 basis points, reflecting a steeper selloff at the short end — a pattern typically associated with near-term tightening expectations. The 30-year German yield rose a more modest 1.1 basis points to 3.665%, suggesting the repricing is concentrated in the front end where monetary policy has the most direct impact.

The last time the ECB held rates steady before delivering a hike at the subsequent meeting was in September 2023, when it raised the deposit rate by 25 basis points to 4%, according to ECB records. That historical precedent suggests the current bond selloff may have further to run if energy costs continue to climb and inflation data in the coming weeks supports another increase.

This article is for informational purposes only and does not constitute investment advice.