Bund Yield Dips as Markets Brace for Central Bank Decisions

Germany’s 10-year Bund yield declined for a second consecutive session, settling at 2.92%, just below Friday’s near two-year high of 2.99%. Investors paused ahead of a critical week of central bank decisions, even as rising oil prices stoked inflation concerns. The escalation of the US-Israeli conflict with Iran has driven energy prices higher, prompting markets to price in a tighter monetary policy from the European Central Bank by year-end. Money markets now fully anticipate an ECB rate hike by July, with an 85% chance of a second increase by December. This week, policymakers at the ECB, Federal Reserve, and Bank of England are widely expected to keep interest rates unchanged, as investors seek guidance on how central banks will respond to the economic fallout from the conflict. Meanwhile, German investor morale collapsed in March, reflecting fears that surging prices could undermine the country’s fragile recovery.

Germany’s 10-year Bund yield held above 2.9%, close to its highest level since October 2023, as escalating tensions in the Middle East heightened inflation concerns and reinforced expectations of further tightening by the European Central Bank ahead of a busy week of global central bank meetings. Oil prices stayed above $100 per barrel, up more than 40% this month, after Iran halted shipments through the Strait of Hormuz in retaliation for US-Israeli air strikes. Israeli officials warned the conflict could last “several more long weeks,” while US President Donald Trump said Tehran is “not ready” to reach a deal. Major central banks, including the ECB and the Fed, are widely expected to keep interest rates unchanged this week. Investors will focus on policymakers’ guidance on how they may respond to the economic fallout from the conflict. Money markets are currently fully pricing in an ECB rate hike by July, with roughly an 85% probability of another increase by the end of the year.

Italy’s 10-year BTP yield climbed toward 3.8%, reaching its highest level since April 2025, as escalating tensions in the Middle East stoked inflation concerns and strengthened expectations for further European Central Bank rate hikes. Oil prices continued to rise despite recent efforts to ease the energy supply shock, with investors skeptical that these measures will fully mitigate potential disruptions in the Strait of Hormuz. The surge in energy costs has prompted money markets to price in two ECB rate hikes this year, a sharp turnaround from last month, when no moves were anticipated. Market attention is now focused on the ECB’s upcoming policy meeting, where President Christine Lagarde is expected to signal how the bank intends to shield the eurozone from inflationary pressures arising from the conflict. Earlier this week, she emphasized that the ECB would act to prevent a repeat of the inflation shocks experienced after Russia’s invasion of Ukraine.