Eurozone government bond yields moved higher on Monday as renewed tensions in the Middle East and higher oil prices revived inflation worries, encouraging investors to favour the U.S. dollar over European fixed-income assets.
Germany’s benchmark 10-year Bund yield rose to 2.86%, recovering from the multi-month lows reached last week, while the policy-sensitive two-year German yield climbed to 2.53% as markets reassessed the outlook for interest rates.
Bond markets came under pressure after renewed military activity around the Strait of Hormuz over the weekend. Although Washington and Tehran agreed to suspend retaliatory strikes ahead of technical talks scheduled for Tuesday in Doha, concerns over the security of one of the world’s most important shipping routes pushed crude oil prices higher, bringing inflation risks back into focus after equity market volatility dominated sentiment last week.
Investors are also preparing for several major economic events later this week. Trading in sovereign debt remained cautious ahead of the latest U.S. non-farm payrolls report, which could either reinforce or challenge expectations that the Federal Reserve will deliver two further 25-basis-point interest rate increases before the end of the year.
Within the euro area, markets are awaiting June data on consumer confidence and business activity. Investors will also closely monitor remarks from European Central Bank President Christine Lagarde as she opens the ECB’s annual Sintra Forum, where Bank of England Governor Andrew Bailey and Federal Reserve Chair Kevin Warsh are also due to participate.
Market participants will be looking for any indication that policymakers disagree with current market expectations, which continue to price in at least one additional 25-basis-point rate increase from the ECB following its recent decision to lift the deposit rate to 2.25%.
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