The yield on German 10-year government bonds touched 3.31% intraday on August 31, a new high since 2011, less than 20 basis points from the previous high of approximately 3.49% in 2011. Subsequent data showed that Germany's August CPI rose to 2.9% year-on-year, with energy prices rising by 10.5%, while core inflation fell to 2.4%, indicating that recent inflationary pressures mainly stemmed from energy shocks.
This round of German bond declines was also compounded by rising oil prices, a global sell-off of long-term bonds, and the expansion of German infrastructure and defense spending and bond issuance. German bonds serve as the benchmark for asset pricing in the Eurozone; persistently high yields will raise financing costs for governments and businesses and increase the discount rate for stock valuations. Even if energy inflation subsequently subsides, a larger supply of government bonds and term premiums may make a return to zero or negative interest rates unlikely.
