German Bund Yields Hit Four-Month Low

Germany’s 10-year Bund yield rose to 2.95%, its highest level since October 2023, as escalating tensions in the Middle East intensified inflation concerns and reinforced expectations of further interest rate hikes. Oil prices extended their rally, briefly surpassing $100 per barrel after Iran increased attacks on oil and transportation infrastructure across the region. The International Energy Agency’s announcement of a 400-million-barrel release from strategic reserves offered little immediate relief to markets, as the additional supply may take weeks or even months to reach buyers. Against this backdrop, money markets are now fully pricing in a European Central Bank rate hike by July, with an 85% probability of a second increase by December. This represents a significant shift from late February, before the outbreak of the Iran war, when traders had assigned roughly a 40% chance that the ECB would cut rates before year-end.

Germany’s 10-year Bund yield climbed back to 2.9%, its highest level since January 23, as investors increasingly priced in a more hawkish stance from the European Central Bank amid renewed inflation concerns. Geopolitical tensions stemming from the Iran conflict have driven energy prices higher, reigniting inflation worries and prompting markets to reassess the outlook for monetary easing. While oil prices have eased from peaks above $100 per barrel, the earlier surge has already significantly influenced rate expectations. Money markets are now pricing in an interest rate hike from the ECB later this year, a marked shift from the modest likelihood of a rate cut seen prior to the conflict. On Tuesday, Christine Lagarde reaffirmed that the central bank stands ready to take all necessary measures to keep inflation under control, despite the current energy price pressures.

Germany’s 10-year Bund yield, the benchmark for European borrowing costs, retreated to 2.84% after approaching 2.9% on Monday, amid hopes that a swift end to the Iran conflict would limit inflationary pressures. A temporary relief came after US President Trump said the military operation in Iran could conclude soon and is progressing well ahead of the initially projected four- to five-week timeline. Oil prices also retreated to below $100 per barrel after Trump hinted at several measures aimed at keeping energy costs under control. Last week, ECB Chief Economist Philip Lane warned that a prolonged conflict in the Middle East and a sustained decline in regional oil and gas supplies could trigger a “substantial spike” in inflation and a “sharp drop in output” across the EA. Against this backdrop, markets now expect the ECB to raise its key interest rate by at least 25bps once this year.