France’s OAT Yields Dip on Iran War Optimism

France’s 10-year OAT yield edged down toward 3.6%, retreating from multi-year highs, as rising hopes for a quick resolution to the Iran conflict alleviated worries about spiraling energy prices and aggressive ECB rate increases. US President Donald Trump’s remark that the US could leave Iran "in two or three weeks," regardless of a deal, bolstered cautious optimism, though mixed signals from Washington sustain uncertainty in the war’s fifth week. Markets have adjusted their ECB rate hike expectations, now anticipating only two increases by December, compared to three forecast earlier this week. Before the conflict, investors had expected no hikes in 2026, with a minor chance of policy loosening.

France’s 10-year OAT yield slipped toward 3.7%, falling back from multi-year highs, as investors reassessed growth risks linked to the energy shock from the Middle East conflict. Despite the late-month easing, yields remained on track to end March up over 50 basis points, amid a broad inflation spike. Soaring energy costs pushed the Eurozone’s inflation rate to 2.5%, exceeding the ECB’s 2% target, while France’s EU-harmonized inflation jumped to 1.9% in March, the highest since August 2024. The data prompted markets to abandon ECB rate cut bets, now pricing in at least two hikes by 2026. French central bank chief François Villeroy de Galhau reaffirmed the ECB’s resolve to combat inflation but cautioned that discussions on rate timing were still premature.

France’s 10-year OAT yield hovered around 3.75%, near its highest level since June 2009, and was on track to rise by roughly 50 basis points in March. Investors grew increasingly wary of the economic consequences stemming from the Middle East conflict, now in its fifth week, which has kept oil prices elevated. Adding to the uncertainty, reports indicated that US President Donald Trump was prepared to end the US military campaign against Iran, even if the Strait of Hormuz remained largely closed. The surge in oil prices pushed Europe’s inflation higher, with France’s EU-harmonized inflation rate climbing to 1.9% in March from 1.1% in February. Markets responded by abandoning earlier expectations of a 40% chance of an ECB rate cut, now pricing in at least two interest rate hikes for 2026. While French central bank chief François Villeroy de Galhau reaffirmed the ECB’s determination to tackle energy-driven inflation, but called timing discussions premature.