# German bonds set for worst month in decades as inflation hits new highs
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-08-31
Category: INVESTING
Category URL: https://financedigest.com/category/investing
Meta Title: Germany's Borrowing Costs Soared on Inflation Surge
Meta Description: Borrowing costs in Germany spike due to inflation fears, with bond yields rising to their highest levels in decades amid surging gas prices and expectations
URL: https://financedigest.com/german-bonds-set-for-worst-month-in-decades-as-inflation-hits-new-highshtml

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By Dhara Ranasinghe

LONDON (Reuters) – Germany’s borrowing costs rose to their highest level in over two months on Wednesday, and were set to end August with their biggest monthly surge in over 30 years, as data showed inflation in the euro area hitting another record high.

Bond markets across Europe have been battered this month as surging gas prices, fueled by concerns about supplies from Russia, exacerbated inflation fears and pushed up expectations for higher interest rates even as recession fears grow.

Euro zone inflation rose to another record high at 9.1% this month, beating expectations and solidifying the case for further big European [Central Bank](https://www.financedigest.com/inflation-trumps-financial-risks-as-central-bank-tightening-set-to-continue.html "Inflation trumps financial risks as central bank tightening set to continue") rate hikes.

Significantly, closely-watched underlying [price growth](https://www.financedigest.com/liverpool-shines-as-one-of-uks-leading-ladies-for-house-price-growth.html "Liverpool shines as one of UK’s leading ladies for house price growth"), which filters out volatile food and energy prices, jumped to 5.5% from 5.1%.

The most disappointing aspect of the [inflation data](https://www.financedigest.com/oil-jumps-on-lower-than-expected-us-inflation-data.html "Oil jumps on lower-than-expected US inflation data") is the core measure, where we have a bigger increase than in the headline measure,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

Even though we will get more support measures to help ease the gas crisis, [inflation will move higher unless policymakers can get a better grip on gas markets](https://www.financedigest.com/hungarys-booming-wedding-market-doused-by-soaring-inflation.html "Hungary’s booming wedding market doused by soaring inflation") in the euro area.

In a sign of the scale of the unease gripping investors, bond markets were [set to end August with heavy price](https://www.financedigest.com/oil-ticks-up-as-u-s-inflation-cools-but-prices-set-for-monthly-drop.html "Oil ticks up as U.S. inflation cools, but prices set for monthly drop") losses that have sent yields soaring.

In Germany, the [euro zone’s benchmark bond](https://www.financedigest.com/delivery-hero-ramps-up-interest-payments-to-raise-1-billion-euro-convertible-bond.html "Delivery Hero ramps up interest payments to raise 1 billion euro convertible bond") issuer, two-year yields rose to their highest since mid-June at around 1.2% and were last up 3 basis points on the day.

They are up around 90 basis points for the month, [set for its biggest monthly gain](https://www.financedigest.com/european-shares-set-for-weekly-gain-on-u-s-inflation-outlook.html "European shares set for weekly gain on U.S. inflation outlook") since 1981, according to Refinitiv data.

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/08/German-2-year-bond-yield-set-for-biggest-monthly-jump-since-80s.jpg)

Germany’s 10-year [bond yield](https://www.financedigest.com/global-equities-gain-as-rising-bond-yields-pressure-gold.html "Global equities gain, as rising bond yields pressure gold") was poised for its biggest monthly jump since 1990, up over 70 basis points. It rose to its highest in just over two months at around 1.55%.

French and Dutch 10-year [bond yields were also set for the biggest](https://www.financedigest.com/ecb-can-cut-carbon-footprint-by-shedding-bonds-of-biggest-polluters.html "ECB can cut carbon footprint by shedding bonds of biggest polluters") monthly jump in decades. In Britain, also hit hard by soaring gas prices, 10-year bond yields were on [track for their biggest monthly surge since](https://www.financedigest.com/the-nasdaq-100-on-track-to-have-its-best-week-since-march-2010.html "The Nasdaq 100 On Track to Have its Best Week Since March 2010") the 1980s.

While gas [prices have come](https://www.financedigest.com/uk-house-prices-speed-up-but-slowdown-coming-nationwide-says.html "UK house prices speed up but slowdown coming, Nationwide says") off their peaks, they are still up 30% in August alone.

Russia meanwhile halted gas supplies via a major pipeline to Europe on Wednesday, intensifying an economic battle between Moscow and Brussels and raising the prospects of recession and energy rationing in some of the region’s [richest countries](https://www.financedigest.com/richest-countries-in-the-world.html "Richest countries in the world").

Front-end rates are very much dancing to the energy market’s tune and this is what propelled them [higher](https://www.financedigest.com/wall-st-indexes-mixed-treasury-yields-tick-up-as-higher-rates-loom.html "Wall St indexes mixed, Treasury yields tick up as higher rates loom") in August,” said ING senior rates strategist Antoine Bouvet.

Clearly the volatility in the gas and power [markets is spilling over into bonds,”](https://www.financedigest.com/how-will-the-ecb-contain-fragmentation-risk-in-euro-area-bond-markets.html "How will the ECB contain fragmentation risk in euro area bond markets?") said Bouvet. The ECB, by voicing fear of de-anchoring of [inflation expectations](https://www.financedigest.com/ecb-survey-shows-rising-inflation-expectations-despite-energy-price-falls.html "ECB survey shows rising inflation expectations despite energy price falls"), has effectively encouraged greater correlation between bonds and energy.

The ECB meets next week and is expected to [hike rates](https://www.financedigest.com/sp-warns-of-possible-economic-blow-hit-to-japan-inc-from-boj-rate-hike.html "S&P warns of possible economic blow, hit to Japan Inc from BOJ rate hike") by at least half a percentage point.

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/08/Euro-zone-inflation-vs.-long-term-market-expectations.jpg)

(Reporting by Dhara Ranasinghe; Editing by Ana Nicolaci da Costa and Tomasz Janowski)


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