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

Germany’s 10-year Bund yield trimmed its rise to 3.09% after softer-than-expected US inflation data for June reduced expectations for Federal Reserve rate hikes this year. However, yields remained at their highest level since May 21, as Middle East tensions raised concerns that higher energy prices could fuel inflation and push interest rates higher. The two-year bond yield, more sensitive to policy rate expectations, also climbed to 2.8%, its highest since July 2024. The US military continued strikes against Iran after President Donald Trump reinstated a blockade on Iranian shipping and proposed a 20% fee to guard the Strait of Hormuz, increasing uncertainty over energy flows. Markets responded by betting on further European Central Bank rate hikes, with money markets pricing in a deposit rate of 2.70% by December (up from the current 2.25%) and fully expecting a September hike.

Germany’s 10-year Bund yield rose above 3.1%, hitting its highest level since May 21, as the Middle East conflict raised concerns that higher energy prices could fuel inflation and interest rates. The two-year bond yield, more sensitive to policy rate expectations, also reached 2.8%, its highest since July 2024. The US military continued strikes against Iran after President Donald Trump reinstated a blockade on Iranian shipping and proposed a 20% fee to guard the Strait of Hormuz, increasing uncertainty over energy flows. Markets responded by betting on further European Central Bank rate hikes, with money markets pricing in a deposit rate of 2.70% by December, up from the current 2.25%, and fully expecting a September hike. In the US, Fed Governor Christopher Waller warned that the central bank may need to raise rates "in the near term" if inflation remains above the 2% target. Investors now await remarks from Federal Reserve Chair Kevin Warsh and US inflation data later today.

Germany’s 10-year Bund yield climbed to 3.05% as oil prices surged following another wave of US strikes on Iran, with both sides locked in a dispute over the Strait of Hormuz. The US Central Command confirmed strikes on dozens of targets to reduce Iran’s ability to threaten shipping, while Iran declared the strait would remain closed "until further notice." The resulting uncertainty amplified inflation concerns, prompting investors to increase bets on further European Central Bank rate hikes. The ECB, which raised rates in June for the first time since 2023, is now expected to deliver two more hikes over the next year, with the first likely in September, to counter inflation driven by rising fuel costs tied to the Iran conflict. ECB policymaker Yannis Stournaras cautioned on Friday that the central bank is "back to square one" in its fight against high inflation in the eurozone.