Bund Yields Rebound as Middle East Tensions Lift Oil

Germany’s 10-year bund yield rose to 2.97%, rebounding from a six-week low touched on Monday, as renewed Middle East unrest weighed on market sentiment and pushed Brent crude higher. Optimism about a resolution to the three-month US-Iran conflict, which has severely disrupted Middle Eastern oil and gas supplies and driven global inflation higher, faded after Washington confirmed it had carried out defensive strikes in southern Iran, signaling that any peace deal remains distant. On the monetary policy front, ECB official Isabel Schnabel told Reuters the central bank should raise interest rates in June even if a peace agreement is reached, citing the scale and persistence of the energy shock. Money markets now price in a 90% chance of a June hike, with roughly 60 basis points of tightening expected by year-end, implying at least two quarter-point increases.

Germany’s 10-year bund yield tumbled below 3%, hitting its lowest level since mid-April, as progress in Iran peace talks and easing inflation concerns triggered a sharp pullback from last week’s 15-year peak of 3.2%. That surge had been fueled by expectations of interest rate hikes after the Iran conflict disrupted energy markets. The reversal came as crude oil prices retreated from four-year highs, with Brent falling below $100 a barrel following US President Donald Trump’s remarks that a memorandum of understanding between the two nations had been "largely negotiated" and would reopen the Strait of Hormuz. Separately, PMI data revealed the Eurozone economy contracted in May at its fastest pace since late 2023, driven by a war-fueled surge in living costs, with S&P Global cautioning that the figures point to inflation nearing 4%. Traders now fully price in two ECB rate hikes this year.

Germany’s 10-year bund yield fell to 3.05% as signs of progress in Iran peace talks eased government borrowing costs from multi-year highs. The yield had reached a 15-year peak of 3.2% on Tuesday amid expectations of interest rate hikes following the Iran conflict’s disruption of energy markets. However, crude oil prices dropped from four-year highs, as both Iran and the US reported headway in negotiations. US Senator Marco Rubio noted "some good signs" in the talks, though Tehran’s uranium stockpile and control over the Strait of Hormuz remain key obstacles. Traders now fully price in two European Central Bank rate hikes this year, with a 60% probability of a third. On the macro front, German consumer sentiment improved heading into June, defying expectations of a further decline, driven by a rebound in income expectations. Business confidence also edged higher in May, recovering from April’s six-year low, while a separate report confirmed 0.3% GDP growth in Q1 2026.