Euro Zone Bond Yields Increase on Caution Over Possible US-Iran Deal
Market Reactions and Economic Implications
By Stefano Rebaudo
June 1 (Reuters) - Euro area government bond yields rose on Monday as investors stayed wary of a potential U.S.–Iran deal to reopen the Strait of Hormuz, a development that could ease inflation pressures and reduce expectations for European Central Bank tightening.
Bond Yields and Oil Prices
Borrowing costs tracked moves in oil prices - which were up 2.5% on Monday, but still below $95 - seen as a proxy for future inflation.
Geopolitical Tensions and Market Sentiment
The U.S. said it struck Iranian military sites at the weekend and Iran's Revolutionary Guards said on Monday they had targeted a U.S. base in response, but President Donald Trump reiterated that Iran really wanted to make a deal.
ECB Policy Expectations
Money markets are pricing the ECB deposit rate at 2.60% by December, up from the current 2% and slightly above the 2.53% level priced in on Friday. They also indicated about an 80% chance of a first rise this month.
"A jaded cynicism has come over investors, and in the absence of a definite statement from Iran there is a tendency to downplay comments from the U.S. administration," Paul Donovan, chief economist at UBS Global Wealth Management, said.
Yield Movements in Major Euro Zone Economies
Germany’s 2-year yields <DE2YT=RR>, more sensitive to expectations for policy rates, rose 6 basis points to 2.59%. They reached 2.771% in late March, the highest since July 2024.
"Ultimately, hopes prevail that a possible framework agreement will pave the way for gradually normalising traffic in the Strait of Hormuz," Rainer Guntermann, economist at Commerzbank, said.
Macroeconomic Data and ECB Meeting
Investors are also monitoring macroeconomic data for early signs of how the energy shock is affecting the economy, while waiting for next week's ECB policy meeting.
Inflation in the euro zone's four largest economies hovered above the ECB's 2% target for a third straight month in May, preliminary data showed on Friday.
Meanwhile, growth in manufacturing lost momentum in May as demand for goods stagnated and supply-chain disruptions linked to the Middle East war pushed input costs to their highest in four years.
Benchmark Yields and Spreads
Germany's 10-year government bond yield <DE10YT=RR>, the euro area's benchmark, was up 5 bps at 2.98%. It reached 3.13% in late March, its highest level since June 2011.
Italy's 10-year government bond yields <IT10YT=RR> rose 6 bps to 3.71%.
The yield gap of Italian government bonds versus bunds <DE10IT10=RR> was at 71 bps. It was at 63 bps before the attack on Iran and hit 103.62 in late March, the highest level since June 2025.
(reporting by Stefano Rebaudo; Editing by Jan Harvey)
