Bund Yields Surge Above 3% as US-Iran Tensions Fuel Inflation Fears

German 10-year bund yields climbed back above 3% as escalating US-Iran tensions threatened their ceasefire, driving oil prices higher and stoking inflation concerns. This also heightened expectations for European Central Bank rate hikes this year. A Washington official confirmed US strikes on an Iranian drone operation near the Strait of Hormuz, following reports that President Donald Trump had rejected a potential compromise with Tehran. In retaliation, Iran’s Revolutionary Guard targeted a US airbase on Thursday. Regional instability deepened further as Kuwait reported countering hostile drone and missile threats. Money markets responded by increasing bets on ECB tightening, pricing in nearly 65 basis points of hikes this year, up from just under 60 basis points late Wednesday.

German 10-year bund yields slipped toward 2.95%, approaching their lowest level since April 8, amid growing optimism over a potential US-Iran peace deal. Investors remain focused on Middle East developments, heartened by the recent absence of negative signals from both sides and lingering hopes that an agreement to ease tensions and reopen the Strait of Hormuz could still be achieved despite recent strikes. Money markets now anticipate the ECB deposit rate at 2.6% by December, up from the current 2% but below last week’s expectation of 2.75%, with an 80% probability of a first rate increase next month. Meanwhile, ECB official Isabel Schnabel told Reuters the central bank should raise interest rates in June even if a peace deal materializes, pointing to the scale and persistence of the energy shock.

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.