Euro zone government bond yields edged up on Monday towards recent peaks after the United States and Iran failed to secure a deal to end the war, pushing oil prices higher, fueling inflation concerns and reinforcing expectations of European Central Bank rate hikes.
Brent crude futures climbed above $100 a barrel as the US Navy prepared to block ships to and from Iran via the Strait of Hormuz, a move that could restrict Iranian oil exports.
Germany’s 10-year government bond yield rose 1.5 basis points (bps) to 3.06%. It reached 3.13% in late March, its highest level since June 2011.
Analysts argued that while the truce was more fragile after the weekend, both parties were unlikely to let full-blown war resume.
Money markets priced in an ECB deposit facility rate at 2.69.% by year-end, implying two hikes and a 75% chance of a third move, from around 2.60% late on Friday.
They also indicated a 45% chance of a rate increase in April from 25% late on Friday. The deposit facility rate is currently at 2%.
“The temporary truce briefly reduced immediate tail risks, but the failure of negotiations over the weekend has underscored that the constraints that matter most for near-term (energy) pricing remain unresolved,” said Tobias Keller, investment strategist at UniCredit.
“Damaged infrastructure, higher insurance and freight costs and persistent logistical frictions imply that any easing in physical tightness will be slow and uneven,” he added.
Germany’s two-year yields, more sensitive to expectations for policy rates, were up 4 bps at 2.62%. They reached 2.771% in late March, its highest level since July 2024.
Italy’s 10-year government bond yields rose 3.5 bps to 3.86%. They reached 4.142% in late March, the highest since July 2024.
The yield gap of Italian government bonds versus Bunds was at 79 bps. It was at 63 bps before the US-Israeli war with Iran began and hit 103.62 during the conflict, the highest since June 20, 2025.
“We would probably need to see a more significant escalation for BTP-Bund spreads to test the March highs again,” said Hauke Siemssen, rate strategist at Commerzbank.
“BTPs should also underperform OATs (French government bonds) again this week as they are more susceptible to energy prices, while we expect the spread to re-tighten over the long term,” he added.
The French spread was at 64.50 bps from 58 bps before the conflict. Fitch confirmed on Friday A+ rating with outlook stable.
