Global Market: Euro zone bond yields hover near 15-year highs as Middle East war fuels inflation fears

Euro zone government bond yields remained close to their highest levels in more than 15 years on Monday as the prospect of a prolonged conflict in the Middle East heightened concerns that energy-driven inflation could prove more persistent, Reuters reported.

Germany’s benchmark 10-year Bund yield was steady at 3.20%, after reaching 3.2118% in late July, its highest level since May 2011. The two-year German yield, which is more sensitive to expectations for monetary policy, was also broadly unchanged at 2.79%.

The bond market has increasingly reflected expectations that the European Central Bank may need to raise interest rates if higher energy prices keep inflation elevated. Money markets were pricing in an ECB deposit rate of around 2.76% by March 2027, compared with the current 2.25%, while implying a more than 90% probability of a rate hike in September.


According to Reuters, investors have become more cautious about the inflation outlook as uncertainty surrounding the Middle East conflict persists. Iran urged the United States to accept defeat on Saturday, while U.S. President Donald Trump warned Americans to prepare for continued high fuel prices as a consequence of the war.

ECB Rate Outlook Comes Into Focus

The latest market pricing marks a significant shift from expectations earlier in the year, when investors largely anticipated a stable or easier monetary policy path. Rising energy costs and the risk of a prolonged disruption to oil supplies have instead raised the possibility that the ECB could be forced to keep policy restrictive for longer.

Reuters reported that Jefferies economist Mohit Kumar expects the ECB to deliver no more than one rate increase, arguing that current oil prices remain below the adverse scenarios considered by the central bank in June. The view suggests that while energy prices pose an upside risk to inflation, they may not yet warrant a prolonged cycle of monetary tightening.

Italian-German Bond Spread Widens

The divergence between euro zone sovereign bonds was also evident in Italy. The yield premium on 10-year Italian government bonds over German Bunds stood at around 77 basis points on Monday.

That spread was significantly narrower at 63 basis points in February, before the attack on Iran, but widened to 103.62 basis points in late March, its highest level since June 2025.

The widening spread highlights the renewed sensitivity of peripheral euro zone debt to geopolitical and inflation risks. Higher borrowing costs could also complicate fiscal policy across heavily indebted economies if elevated yields persist.

Energy Prices Remain a Key Risk

For European investors, the trajectory of energy prices remains central to the outlook for both inflation and monetary policy. A prolonged Middle East conflict could keep fuel costs elevated and delay the return of inflation to the ECB’s target.

Reuters noted that markets are therefore closely watching developments in the conflict alongside incoming economic data for signs of whether the energy shock is broadening into wider price pressures.

For now, euro zone bond markets remain caught between expectations of limited ECB tightening and concerns that persistent energy inflation could force policymakers to maintain a more hawkish stance. The direction of oil prices and the duration of the Middle East conflict are likely to remain key drivers of bond yields in the weeks ahead.