Euro zone bond yields tick higher along with oil prices after big swings

Euro zone bond yields edged higher on Wednesday as oil prices climbed, a day after swinging dramatically over the re-escalation of conflict in the Middle East and the release of U.S. inflation data.

Germany's 2-year bond yield was last up 3 basis points at 2.7552%. Yields move inversely to prices.

The yield, which is sensitive to ‌central bank ⁠rate expectations, ⁠rose as much as 8 bps on Tuesday to a two-year high as oil prices jumped on the U.S.-Iran conflict, before falling sharply after U.S. inflation data came in weaker than expected and ending roughly flat on the day.


The framework deal to end the war has all but collapsed, with the U.S. and Iran continuing to trade strikes on Tuesday and Wednesday after ⁠Iran said ‌it had closed the Strait of Hormuz and the U.S. reimposed a naval blockade of Iranian ports.

Iran's Islamic Revolutionary Guard Corps ⁠has threatened to close other export corridors, Iranian media reported, in a possible sign it could use its Houthi allies in Yemen to shut the Bab el-Mandeb gateway to the Red Sea, putting two of the world's most vital energy arteries at risk.

Oil prices rose on Wednesday, with Brent crude up 0.8% at $85.40 a barrel.

Germany's 10-year bond yield, the benchmark for the euro zone, rose 3 bps to ‌3.099%.

A jump in oil prices over the last week has seen traders sharply raise their bets on ECB rate hikes this year, but they wound them back ⁠in somewhat after the U.S. CPI inflation data.

Money markets were last pricing in 40 bps of further ECB tightening this year, up from 30 bps a week ago but down from a peak of 48 bps on Tuesday.

Data on Tuesday showed headline U.S. inflation slowed more than expected to 3.5% year-on-year in June, down from 4.2% in May, although the fall was largely due to a drop in energy prices which is now under threat.