German Bund Yields Climb Amid Iran Tensions and Inflation Pressures

Germany’s 10-year Bund yield rose toward 3.1% after the extended Easter break, hovering near multi-year highs reached at the end of last month, as markets await US President Donald Trump’s deadline for Iran to reopen the Strait of Hormuz and agree to a ceasefire, or get "taken out". Investors have adopted a "wait-and-see" stance ahead of the deadline, with Trump’s threat of massive strikes on Iranian infrastructure driving energy prices higher and leading to a reassessment of central bank policies, with markets now pricing in three interest rate hikes by the European Central Bank this year. Speaking to the Wall Street Journal, ECB policymaker Pierre Wunsch suggested the bank may need to raise rates multiple times, starting this month, if the energy fallout from the Middle East war persists.

Germany’s 10-year Bund yield climbed back above 3% on Thursday, nearing its highest level since May 2011, as escalating Middle East tensions weighed on European bonds. President Donald Trump’s prime-time address lacking a clear timeline for resolving the conflict fueled the sell-off. While Trump indicated the US operation was nearly complete, his pledge of more aggressive actions, including potential strikes on electrical plants in the coming weeks, deepened market unease. With no new rationale for the war and mounting uncertainty, inflation concerns have intensified, prompting a reassessment of the European Central Bank’s policy outlook. Investors now expect three interest rate hikes in 2026, up from two just a day earlier. Before the conflict, markets had anticipated no hikes at all, with some even betting on monetary easing.

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.