Global bond market selling pressure spread to Europe after Federal Reserve Chair Kevin Warsh struck a hawkish tone at the Jackson Hole Economic Symposium last week. Germany’s 2-year government bond yield jumped to 2.898% on Monday (Aug. 31), its highest level since July 2024, while the benchmark 10-year yield touched 3.2903%, surging to a level not seen since 2011.
In his speech, Warsh reiterated that central bank policymakers “still have work to do” in curbing stubborn inflation — remarks that drove U.S. short-dated Treasury yields sharply higher and quickly spilled across the Atlantic into European bond markets. Traders aggressively repriced near-term rate expectations on both sides of the ocean, sending sovereign debt across core European countries under broad pressure as yields rose across all maturities.
Money market data shows traders have dramatically raised the probability of a Fed quarter-point rate hike in September from roughly 35% earlier last week to nearly 60%. This hawkish sentiment has dampened demand for European sovereign bonds, with investors now demanding higher term premiums to compensate for the risk of holding longer-dated debt in an environment of sticky inflation and heavy sovereign issuance.
Europe’s own monetary policy outlook is also tightening in tandem. European Central Bank Governing Council member Primoz Dolenc publicly stated that there is “ample justification” for a rate hike next month. The interest rate swap market has now fully priced in a quarter-point increase at the ECB’s September 10 meeting.
The U.S.-Iran war has driven up energy costs, and European economic resilience has exceeded expectations, convincing markets that the ECB still has room to tighten further. Eurozone inflation data due later this week is expected to show core price pressures remain stubborn, further reinforcing the case for a September hike.
European bond markets had already begun pricing in this hawkish shift last Friday (Aug. 28). German and UK 2-year government bond yields rose roughly 4 to 5 basis points each, while Germany’s 10-year yield climbed 2 basis points to 3.27% and the UK 10-year yield also added 2 basis points to 5.05%. The notably larger moves at the short end flattened the yield curve, signaling that investors expect higher policy rates to hit short-dated bonds first, while a more aggressive anti-inflation stance also helps contain long-term inflation premiums.
Other major eurozone government bond markets came under similar pressure. Italy’s 10-year yield rose 2 basis points on Friday to 4.09%, with the spread over German bunds of the same maturity narrowing 1 basis point to 82 basis points. France’s 10-year yield added 1 basis point to 4.10%.
Market focus has gradually shifted from “whether the ECB will hike” to “how much further rates will rise after the first move.” Trading desks are closely watching speeches from multiple Fed officials this week, including Governor Michael Barr on Tuesday and Governor Christopher Waller on Thursday, as well as Friday’s U.S. August employment data — all of which will provide clearer guidance on the September rate hike outlook.
For European bond markets, short-end yields continue to face the greatest upward pressure as investors reposition for an environment of higher-for-longer policy rates.