German Bund Yields Slip as Fed Policy Decision Nears

German 10-year bund yields slipped toward 2.95%, approaching their lowest level since April 8, amid growing optimism over a potential US-Iran peace deal. Investors remain focused on Middle East developments, heartened by the recent absence of negative signals from both sides and lingering hopes that an agreement to ease tensions and reopen the Strait of Hormuz could still be achieved despite recent strikes. Money markets now anticipate the ECB deposit rate at 2.6% by December, up from the current 2% but below last week’s expectation of 2.75%, with an 80% probability of a first rate increase next month. Meanwhile, ECB official Isabel Schnabel told Reuters the central bank should raise interest rates in June even if a peace deal materializes, pointing to the scale and persistence of the energy shock.

Germany’s 10-year bund yield rose to 2.97%, rebounding from a six-week low touched on Monday, as renewed Middle East unrest weighed on market sentiment and pushed Brent crude higher. Optimism about a resolution to the three-month US-Iran conflict, which has severely disrupted Middle Eastern oil and gas supplies and driven global inflation higher, faded after Washington confirmed it had carried out defensive strikes in southern Iran, signaling that any peace deal remains distant. On the monetary policy front, ECB official Isabel Schnabel told Reuters the central bank should raise interest rates in June even if a peace agreement is reached, citing the scale and persistence of the energy shock. Money markets now price in a 90% chance of a June hike, with roughly 60 basis points of tightening expected by year-end, implying at least two quarter-point increases.

Germany’s 10-year bund yield tumbled below 3%, hitting its lowest level since mid-April, as progress in Iran peace talks and easing inflation concerns triggered a sharp pullback from last week’s 15-year peak of 3.2%. That surge had been fueled by expectations of interest rate hikes after the Iran conflict disrupted energy markets. The reversal came as crude oil prices retreated from four-year highs, with Brent falling below $100 a barrel following US President Donald Trump’s remarks that a memorandum of understanding between the two nations had been "largely negotiated" and would reopen the Strait of Hormuz. Separately, PMI data revealed the Eurozone economy contracted in May at its fastest pace since late 2023, driven by a war-fueled surge in living costs, with S&P Global cautioning that the figures point to inflation nearing 4%. Traders now fully price in two ECB rate hikes this year.