How far will yields go up?

Yields on government bonds have risen worldwide this year. The yield on 10-year German government bonds rose by nearly one percentage point since the beginning of this year and recently broke through the 3.5% mark. For shorter maturities, the increase was even greater. All of this not only strains government finances but also affects bond and loan interest rates for German companies. We analyze the reasons for the rise in yields and provide an outlook.

Energy prices are driving inflation expectations, ...

One of the most important drivers of yields is inflation. The conflict in the Persian Gulf has recently pushed inflation in the euro area up to 3.2%, and it is expected to rise further. This is because attacks on a key pipeline in Saudi Arabia and other incidents have sent the price of Brent crude soaring to just under $110.

The current rise in inflation has also caused investors’ inflation expectations for the future to rise, which is why they are demanding – and successfully securing – higher bond yields as compensation. However, this primarily affects bonds with shorter and medium-term maturities. Long-term inflation expectations for the next five to ten years, as derived from market data, have remained largely stable

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