Thursday marked the third session of rally for Germany's bond yields after European Central Bank President Mario Draghi said Wednesday that investors would have to get used to volatility in financial markets. Euro hit the highest level since May 18.
In early trade, the yield on the 10-year German bund was at 0.966%, its highest since October last year, and a jump of more than 0.40 percentage point since the start of the week.
The Stoxx Europe 600 index slumped 1.7% in early trade to 389.42.
"Our monetary policy measures have contributed to a broad-based easing in financial conditions, a recovery in inflation expectations and more favourable borrowing conditions for firms and households," ECB President Mario Draghi said on Wednesday after the bank left its key interest rate unchanged at 0.05%.
Inflation in the eurozone is now expected to be 0.3% this year, against the ECB's previous prediction of zero.
Christoph Rieger, a strategist at Commerzbank noted that inflation was climbing faster than it was estimated, coupled with a resolution in Greece; the U.S. economy was rebounding swiftly; and the ECB was not “bothered by higher volatility” would create “the perfect storm” for yields.
It could even take the yield on the 10-year German bond to 1% before the summer, he said. Yields rise as prices fall.
Growing inflation threatens to erode the value of bonds over time. Moreover, German bunds are widely considered to be a low-risk
asset, and signs of an improving economy can prompt investors to seek
higher yields elsewhere, says MarketWatch.
EUR/USD was last up 0.72% to trade at 1.1355, the most since May 18, rebounding from session lows of 1.1232.
