European bond yields surged to fresh multi-year highs on the final trading session of August, with the German 10-year Bund yield reaching 3.3% for the first time since May 2011, as rising oil prices and a more hawkish Federal Reserve outlook fueled expectations for higher interest rates. Oil prices traded higher after the US said it had attacked an Iranian island in the Strait of Hormuz, while Tehran said it had retaliated by targeting US assets in the region. Markets are now pricing the European Central Bank’s deposit rate at around 2.70% by December, implying roughly an 80% probability of a second rate hike following an expected move as early as September, from the current 2.25%. Investors are also positioning for euro-area rates to move closer to 3% by late 2027. Meanwhile, Fed Chair Kevin Warsh warned that inflation has not slowed meaningfully and that the Fed still has “work to do,” prompting markets to price in roughly a 60% chance of a September rate hike.