Global Market: Euro zone, US bond yields log biggest monthly rise since March on Middle East inflation concerns

Euro zone and US government bond yields were on course to post their biggest monthly increase since March, as investors reassessed the long-term economic impact of the conflict in the Middle East and scaled back expectations for interest rate cuts, according to Reuters.

While bond yields edged lower on Friday alongside easing oil prices, they remained significantly higher for the month. Improved energy supplies through key maritime routes helped calm markets despite limited progress in diplomatic talks between the United States and Iran, Reuters reported.

The selloff in bonds gathered pace through July as traders adopted a more hawkish outlook on monetary policy across both sides of the Atlantic. Renewed concerns that the Middle East conflict could stoke inflation prompted investors to push back expectations for interest rate cuts, driving bond yields higher.


Market pricing now indicates that traders expect the European Central Bank's deposit rate to stand at 2.75% in early 2027, returning to levels last seen during the peak of tensions linked to the Iran conflict. In the United States, investors have also sharply reduced expectations for Federal Reserve rate cuts.

According to Reuters, the ECB raised its key interest rate to 2.25% in June before keeping policy unchanged this month. Meanwhile, the Federal Reserve has maintained its current policy stance, with markets now expecting two rate hikes by June next year, including an almost fully priced increase in October.

Germany's two-year government bond yield, which is highly sensitive to changes in monetary policy expectations, slipped 0.5 basis points on Friday to 2.76%. Despite the daily decline, it remained on track for a monthly increase of 22 basis points.

In the United States, the two-year Treasury yield was steady at 4.23% and was set to finish July around 9 basis points higher.

Longer-dated government bonds underperformed during the month as investors focused on the potential consequences of a prolonged Middle East conflict. Reuters reported that markets increasingly factored in the likelihood of higher government spending, wider fiscal deficits and rising debt burdens, putting additional upward pressure on long-term borrowing costs.

Germany's benchmark 10-year bond yield eased 1.5 basis points to 3.15% on Friday but remained on course for a monthly rise of 28 basis points.

The benchmark US 10-year Treasury yield also declined 1.5 basis points during the session to 4.65%, though it was still poised to end July roughly 22.5 basis points higher.

In Asia, Japanese government bond yields were largely unchanged after the Bank of Japan left interest rates steady while signalling that further policy tightening remains possible. Japan's benchmark 10-year government bond yield held flat at 2.79%.