Bund Yields Fall as Oil Prices Drop

German 10-year Bund yields eased to 3.2%, near their lowest level since August 14, as falling oil prices raised hopes that the Strait of Hormuz could reopen, while traders assessed the outlook for ECB interest rates. Iran said it had resumed talks with Oman on managing the Strait, reviving optimism that the key waterway could reopen and ease disruptions to energy shipments. Meanwhile, Reuters reported that ECB policymakers are prepared to raise rates at their September meeting to contain the economic fallout from the Iran war, but are reluctant to signal further tightening thereafter. Separately, ECB board member Isabel Schnabel said rates may need to rise further as the Middle East conflict persists, citing upside risks to inflation from the resilient euro-area economy. Money markets were pricing less than 40 bps of additional ECB tightening by year-end, with a September rate hike nearly fully priced in.

German 10-year Bund yields remained above 3.2%, remaining close to the 15-year high of 3.275% touched last week, as investors continued to assess inflation risks stemming from the US-Israeli war with Iran and elevated levels of government spending. Meanwhile, oil prices fell after US threats of an “economic D-Day” of sanctions on Iran had little impact. Brent nevertheless remained elevated, with markets facing risks of further supply constraints for refined fuels, low gas inventories and a prolonged conflict that could extend beyond November's US midterm elections, prompting traders to increase their bets on ECB rate hikes. Money markets now price more than 40 basis points of additional ECB tightening this year, with the first move fully priced in as soon as next month. Resilient economic growth has also pushed up bond yields and rate-hike expectations. Data on Tuesday showed the German economy grew 0.3% in Q2 2026, above the preliminary estimate of 0.2%.

German 10-year Bund yields remained above 3.2%, near its highest level since March 2011, as investors prepare for a more hawkish European Central Bank and await details on sanctions against Iran. The ECB is widely expected to raise interest rates in September, following its June tightening to address inflation pressures caused by the US-Iran conflict and its impact on energy prices. Oil prices remain above $90 per barrel, with risks of further supply constraints for refined fuels, low gas inventories, and a prolonged conflict that could extend beyond the US midterm elections in November. A September rate hike would bring the deposit rate to 2.5%, but expectations for further tightening are growing. Markets now price a 25% chance of the deposit rate reaching 3% by March 2027 and a 60% chance by September. Meanwhile, US Treasury Secretary Bessent will hold a press conference after threatening "the toughest sanctions in history" on Iran, with markets watching for potential China targets.