Bund Yields Rise as Middle East Tensions Drive Inflation Fears

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.

Germany's 10-year Bund yield fell to 3.03%, down from a near two-month high of 3.09% on Thursday, as crude prices declined amid resumed US-Iran peace talks following recent hostilities in the Strait of Hormuz. Earlier this week, oil prices had surged to two-week highs after US President Trump declared the Iran ceasefire over, though he noted Tehran’s continued interest in a deal. Still, yields rose 10 bps this week, the largest increase in five weeks, driven by expectations of further European Central Bank tightening. The ECB raised rates at its June meeting for the first time since 2023, and investors anticipate two more hikes over the next year to counter the inflationary impact of rising fuel costs from the Iran conflict. ECB policymaker Yannis Stournaras said the bank is "back to square one" in its inflation fight due to rising oil prices from the Iran conflict. On the political front, Germany approved a 2027 budget draft with €555.4 billion in spending and higher borrowing.

Germany’s 10-year Bund yield remained close to 3.1%, near its highest level since May 21, following its longest winning streak since January as expectations grew for another European Central Bank interest rate hike in September. On Wednesday, Brent crude reached two-week highs after renewed US-Iran strikes, with US President Trump declaring the Iran ceasefire over. However, he also stated that Iran still wants to make a deal "badly," leaving room for potential negotiations. Traders are now pricing in over 30 basis points of additional ECB tightening this year, signaling at least one potential rate hike. Politically, Germany’s cabinet approved a 2027 budget draft, planning €555.4 billion in spending and increasing borrowing to €203.6 billion, up from earlier estimates. In France, far-right leader Marine Le Pen confirmed her 2027 presidential bid, with polls favoring her National Rally, while uncertainty remains over President Macron’s successor.