German government bond yields have risen at their highest level in decades during August, reflecting hot inflation data and rising interest rates.

Yields on 2-year bonds issued by Europe’s largest economy have skyrocketed by 85 basis points this month. That would be the biggest monthly move higher since 1981, according to Refinitiv data.

Meanwhile, 10-year bond yields have risen more than 65 basis points, their highest monthly gain since 1990.

The two-year yield on German bonds was 1.117% as of 8 a.m. ET Wednesday, 2 basis points higher than the previous day. The 10-year yield rose 1 basis point to 1.522%.

French bond yields also rose, with 2-year yields rising to levels last seen in 2011 and 10-year yields rising to levels last seen in 2013.

Flash figures published Wednesday morning show eurozone inflation hit a new record high of 9.1% in Augustsupported by soaring energy costs and higher prices for food, alcohol and tobacco.

Higher interest rates tend to make bonds less attractive and lower their prices, which move against yields.

“European bonds are closely following developments in energy markets,” Antoine Bouvet, senior interest rate strategist at Dutch bank ING, told CNBC by email.

“With energy bills set to soar across Europe, bond markets conclude that the European Central Bank will be forced to make more aggressive hikes in this cycle.”

This is intensified by hawkish comments made by Federal Reserve officials at the Jackson Hole symposium, he added.

Following the release of inflation data, analysts at Pantheon Macroeconomics said they now expect the ECB to raise its deposit rate by 50 basis points three more times before the end of the year.

The bank raised interest rates by 50 basis points to zero last month.

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However, the ING economics team predicts that a 50 basis point increase by the ECB next week will be followed by a 25 basis point increase in October, followed by a longer lull into spring.

That’s because it may be “easier said than done” for the ECB to follow the Fed’s lead in viewing recession as an acceptable cost of tackling inflation, said Carsten Brzeski, head of global macro research. “If we’re right, bond yields should also start to fall again,” Brzeski said.

The outlook for bonds is highly dependent on how energy trades in the coming weeks as the market focuses on inflationary trends, Bouvet ING added.

“There will come a time this winter when the growth implications will hit home and we expect bond yields to drop again,” he said.

“This will lead to more lower risk asset performance, increase safe haven demand for government bonds, and also prompt markets to question their assumptions in terms of central bank gains.”

The team expects the 10-year bund yield to trade through 1% in the first quarter of 2023, down from its current level of 1.5%.

Meanwhile, UK 10-year bond yields will post their biggest gain since May 1994 this month, Reuters reports. The 10-year gold yield was up 8 basis points to 2.793% by 8 a.m. ET, up from 1.72% in early August.

In the US, the yield on the 2-year Treasury note has reached its highest level of almost 15 years.

By Blanca

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