Bund Yields Rise on Hormuz Uncertainty

German 10-year Bund yields edged higher to 3.25% as oil prices paused their recent sell-off, with prospects for an agreement to reopen the Strait of Hormuz still uncertain despite conflicting signals from Iran. Qatar's prime minister is due in Tehran on Thursday to revive US-Iran diplomacy, with the two sides still divided over control of the key waterway. In money markets, traders are pricing slightly more than 40 bps of additional ECB tightening by year-end, with a September rate hike almost fully priced in. Reuters reported that ECB policymakers are prepared to raise rates at their September meeting to contain the economic fallout from the Iran war, although they remain reluctant to signal further tightening beyond that. Eurozone bond yields reached multi-year highs last week as investors grew increasingly concerned about the inflationary impact of higher energy prices, as well as rising government spending.

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%.