Bund Yield Dips as ECB Rate Hike Bets Ease

Germany’s 10-year Bund yield fell further below 3% as investors dialed back expectations for European Central Bank rate hikes in 2026, with optimism over a potential US-Iran peace deal pushing oil prices lower and easing inflation concerns. Brent crude held just under $100 a barrel after a 10% drop on Wednesday, following Washington’s proposal to Iran, a one-page memorandum outlining steps to reopen the Strait of Hormuz and lift the US blockade on Iranian ports. Investors are now awaiting Tehran’s response. Money markets currently price in about 50 basis points of tightening, or two rate hikes, by year-end, with a 75% probability of a first increase in June. ECB board member Piero Cipollone recently noted that the likelihood of a rate hike had risen due to persistent inflation pressures, echoing similar comments from other policymakers earlier this month.

Germany’s 10-year Bund yield extended its decline below 3% as investors scaled back expectations for ECB rate hikes in 2026, with optimism over a potential US-Iran peace deal pushing oil prices lower and easing inflation concerns. Money markets now expect the ECB’s deposit facility rate to reach around 2.6% by December, reflecting two fully priced hikes and a possible third, with a 75% chance of a first rate increase in June. On Wednesday, ECB board member Piero Cipollone said the likelihood of a rate hike had risen due to high inflation pressures, echoing similar remarks from other policymakers earlier this month. According to Axios, the White House is close to a one-page Memorandum of Understanding with Iran to end the conflict and begin nuclear negotiations, the closest the parties have been to a deal since the conflict started. Tehran is expected to respond within 48 hours, though no agreement is finalized.

Germany’s 10-year Bund yield fell below 3% as growing optimism over a potential US-Iran agreement drove oil prices lower, easing inflation pressures. US President Donald Trump announced a pause in "Project Freedom," the Strait of Hormuz escort operation, citing "great progress" in mediated talks with Iran. However, he stressed that the US blockade on Iranian ports would "remain in full force and effect." Despite the pullback, Bund yields stay close to 15-year highs, with investors still pricing in potential European Central Bank rate hikes due to the Middle East conflict’s persistent impact on inflation. Money markets now expect the ECB’s deposit facility rate to reach around 2.6% by December, reflecting two fully priced hikes and a possible third, with a 75% probability of a first rate increase in June.