Bund Yields Surge on Inflation Fears and ECB Rate Hike Expectations

German 10-year Bund yields approached 3.1% as inflation concerns grew and expectations of an ECB interest rate hike intensified. The rise came amid escalating tensions in the Middle East, with the US and Iran exchanging fresh strikes. President Donald Trump warned that Iran is taking "too long" to negotiate a peace agreement and will now "pay the price," while Iranian Parliament Speaker Mohammad Bagher Ghalibaf stated on Wednesday that Tehran would respond "decisively and without delay" to any aggression. Investors are also focused on the European Central Bank’s policy meeting on Thursday, where policymakers are widely expected to implement a 25-basis-point rate hike, the first move in a year, following the Israel-Iran conflict, which triggered an energy crisis and heightened inflationary pressures. Markets will closely monitor President Lagarde’s press conference for clues on future policy moves.

German 10-year Bund yields held just above 3.05%, their highest level since May 21, as easing tensions between Israel and Iran temporarily soothed concerns that weekend attacks could disrupt US-led peace efforts in the Middle East. Investors are also focused on the European Central Bank’s policy meeting on Thursday, where policymakers are widely expected to deliver a 25-basis-point rate hike, the first move in a year, after the Israel-Iran conflict triggered an energy crisis and fueled inflationary pressures. Markets will closely watch President Lagarde’s press conference for signals on future moves. The anticipated hike comes as euro-area inflation climbed to the highest in over two and a half years. Money markets are pricing in around 70 basis points of tightening by year-end, suggesting one additional quarter-point increase and a more than 70% probability of a third.

German 10-year Bund yields climbed above 3.05%, reaching their highest since May 21, as traders nearly fully priced in three European Central Bank rate hikes this year. Fading hopes for a swift reopening of the Strait of Hormuz, combined with a over 4% surge in Brent crude after Iran and Israel exchanged missile strikes, fueled the shift. This occurred despite President Trump’s calls for de-escalation. With the ECB policy meeting approaching, a 25 basis point rate increase is widely expected. The move follows euro-area inflation rising to 3.2% in May, its highest in over two and a half years. However, uncertainty remains after Eurozone GDP figures were revised to show a contraction in Q1 2026, the first since late 2022 and the steepest since mid-2020. Money markets now price the ECB deposit rate at around 2.7% by December, up from the current 2%, and indicate a near-certain first rate rise this month, followed by a second in September.