Eurozone government bond yields were little changed on Friday as markets steadied following a sharp sell-off in the previous two sessions, driven by renewed concerns that escalating tensions between the United States and Iran could reignite energy-led inflation.
Germany’s benchmark 10-year Bund yield edged higher to 3.033%, remaining close to its highest level in seven weeks. The benchmark recorded its biggest two-day rise in several months on Wednesday and Thursday after heavy military exchanges between Washington and Tehran unsettled global markets.
The yield on Germany’s two-year government bond, which closely reflects expectations for European Central Bank (ECB) monetary policy, held around 2.63% after experiencing a similarly pronounced jump as investors moved away from safe-haven debt.
Inflation Fears Return to the Forefront
The latest escalation, which has raised concerns over the durability of the fragile ceasefire agreed on 17 June, followed U.S. strikes on Iranian targets and subsequent retaliation by Tehran against American assets in Kuwait and Bahrain.
Disruption to shipping through the Strait of Hormuz has fuelled a sharp rise in oil prices, with Brent crude climbing back towards $78 per barrel, prompting investors to reassess near-term inflation expectations.
Before this week’s geopolitical developments, bond markets had been pricing in the prospect of easing inflation and a more neutral approach from central banks. The renewed conflict has now cast doubt over that outlook, forcing investors to reconsider the likely path of monetary policy.
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