Euro zone yields nudge higher on US-Iran ceasefire worries

Euro zone bond yields ticked higher on Monday, as concerns grew that the ceasefire between the United States and Iran might not hold, though borrowing costs were still meaningfully below their late-March highs hit before the ceasefire was announced.

Germany's 10-year bond yield, the benchmark for the euro zone, rose 2 basis points to 2.99%. Rate-sensitive two-year yields rose 4 bps to 2.46%.

The United States said it had seized an Iranian cargo ship that tried ‌to run its ⁠blockade on ⁠Sunday, and Tehran vowed to retaliate, refusing for now to join new peace talks.


That sent benchmark Brent crude futures up 5% ​on the day on Monday to $95 a barrel, underscoring worries for bond investors that sustained high energy costs could force central banks ​to hike rates to prevent a broader surge in inflation.

Money markets see a small chance of a European Central Bank rate hike later this month, but see a 25-bp hike as likely by June and are close to fully pricing two such moves by year-end.

That is ⁠a dramatic ‌shift from before the war, when markets thought the ECB would remain on hold ​this year, but ​felt there was a chance they would cut rates.

However, market optimism that some sort ⁠of deal will be achieved in the end has seen pricing retreatin ​recent weeks - at times in March, traders were pricing three 25-bp rate hikes, with ​the first maybe as soon as this month's meeting, sending Germany's two-year yield as high as 2.77%.

Now that looks unlikely.

Analysts at UBS said in a Monday note that they thought the ECB would remain on hold at next week's meeting as the ECB would not have sufficient data to justify a hike.

UBS anticipates a rate increase in June and September, but cautions it depends on developments with the war. If ‌traffic were to resume through the key Strait of Hormuz "it could potentially lead to lower energy prices and grant the ECB more time before deciding on rate hikes".

Bond yields, particularly ​short-dated ones, have ​been swinging dramatically since the war ⁠began based on headlines suggesting escalation or de-escalation, though Monday's moves were much less dramatic than earlier in April or in March.

Goldman Sachs analysts expect this trend to continue.

"As market perceptions solidify around a negotiated ​solution to the conflict in Iran, we continue to expect rates volatility to come down," they said.

They added longer-dated bonds could become more volatile than shorter-dated ones in the coming weeks as focus shifts from the ECB's policy stance "to medium-term fiscal responses to address energy and defence challenges in Europe".

Italian bonds underperformed the German benchmark on Monday, with their 10-year yield up 5 bps to 3.73% and their 2-year yield nearly 4 bps higher to 2.65%.