Bund Yields Plunge as US-Iran Ceasefire Eases ECB Rate Hike Expectations

Germany’s 10-year Bund yield dropped 15 basis points to 2.93% as oil and European gas prices tumbled following a US-Iran ceasefire agreement. The deal, which halts the US-Israel military campaign in exchange for Iran reopening the Strait of Hormuz, has fueled hopes of a temporary de-escalation in the Middle East, though deeper tensions persist. The easing of geopolitical risks prompted investors to scale back expectations for European Central Bank (ECB) rate hikes, effectively removing one hike from their 2026 forecasts. Markets now anticipate two rate increases this year, down from previous projections.

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.