German Yields Steady as Markets Brace for Confidence Vote, ECB, and US Data

Germany’s 10-year Bund yield fell to 2.96%, retreating from recent multi-year highs, as growing hopes for a swift end to the Iran conflict eased concerns over soaring energy prices and aggressive ECB rate hikes. US President Donald Trump’s statement that the US could withdraw from Iran "in two or three weeks," with or without a deal, added to the cautious optimism, though Washington’s shifting timelines and mixed signals have kept uncertainty alive in the war’s fifth week. Markets scaled back ECB tightening bets, now pricing in just two rate hikes by December, down from three expected earlier this week. Before the conflict, investors had anticipated no hikes in 2026, with a slight chance of monetary easing.

Germany’s 10-year Bund yield eased to 3%, falling back from multi-year highs, as investors reassessed economic growth risks linked to the energy shock from the Middle East conflict. However, yields remained on track to end March up 37 basis points, the largest monthly increase since late 2022, amid a broad inflation spike. Soaring energy costs pushed the Eurozone’s inflation rate to 2.5% and Germany’s EU-harmonized rate to 2.8%, both exceeding the ECB’s 2% target and marking the highest readings in over a year. The data prompted markets to ditch rate cut expectations, now anticipating at least two ECB hikes by 2026. While ECB’s François Villeroy de Galhau underscored the bank’s determination to curb inflation, he stressed that timing discussions for rate moves were still premature.

Germany’s 10-year Bund yield was poised to end March at 3%, close to its highest level since May 2011, after surging 36 basis points, marking the largest monthly rise since late 2022. Investors intensified their focus on the economic impact of the prolonged Middle East conflict, now in its fifth week, which has sustained elevated oil prices. Adding to the uncertainty, reports suggested that US President Donald Trump was willing to halt the US military campaign against Iran, even if the Strait of Hormuz remained blocked. The surge in energy prices pushed Europe’s inflation higher, with Germany’s EU-harmonized inflation rate climbing to 2.8% in March. Markets, in response, abandoned expectations of an ECB rate cut, now anticipating at least two interest rate hikes in 2026. While ECB’s François Villeroy de Galhau reaffirmed the bank’s commitment to combating energy-driven inflation, he cautioned that discussions on the timing of rate adjustments were still premature.