- Eurozone government bond yields climbed to multi-week highs amid volatile trading, as uncertainty in the Middle East continued to trigger position adjustments, with Germany's 10-year bond yield rising to around 3.06%.
- Although Iran and Israel hinted at halting mutual attacks at the urging of U.S. President Donald Trump, Tehran's additional conditions regarding the situation in Lebanon made it difficult for geopolitical risk premiums to fully dissipate, impacting the commodities market, with oil prices rising by 1.5% on the day.
- The currency market accelerated pricing in the European Central Bank's (ECB) tightening path, with traders widely expecting a 25 basis point rate hike at this week's policy meeting, and deposit rates potentially rising from the current 2% to about 2.69% by the end of the year.
Geopolitical Uncertainty Dominates Market Sentiment
On Monday, Eurozone bond market sentiment leaned towards caution amid volatility. Despite official statements from Iran and Israel that they had ceased mutual attacks at the behest of the U.S., Tehran emphasized that military actions would resume if Israel continued to strike Hezbollah in Lebanon. This fragile informal ceasefire failed to completely alleviate market concerns about energy supply bottlenecks in the Strait of Hormuz. If geopolitical conflicts escalate again and disrupt supply chains, imported inflation pressures could further weaken the European Central Bank's window for subsequent monetary policy easing.
German Bond Yields Under Broad Pressure
As the Eurozone benchmark, Germany's 10-year government bond yield (DE10YT=RR) briefly touched 3.072% during the session, marking the highest level since May 22, and closed at 3.06%, up 2 basis points on the day. The yield on Germany's 2-year government bond (DE2YT=RR), which is more sensitive to policy rates, also reached a multi-week high of 2.734%, last reported at 2.70%. Analysts noted that with the stabilization and rebound of commodity prices such as oil, Germany's 10-year bond yield may find it difficult to fall below the 3.00% threshold in the short term, and the overall bond market valuation faces reassessment.
Supply Pressure and Macro Data Dual Resonance
Kenneth Broux, Head of FX and Rates at Societe Generale's Corporate Research Department, stated that in addition to rising oil prices, the factors supporting higher Eurozone yields include the temporary pressure from this week's large-scale supply of German bonds. Furthermore, global traders are focusing on the U.S. Consumer Price Index (CPI) data to be released on Wednesday, and proactive position adjustments ahead of the release of key macro indicators have also amplified the volatility of Eurozone bond yields.
ECB Rate Hike Path Re-anchored
Investors are currently fully preparing for the European Central Bank's monetary policy decision later this week. Current money market swaps indicate that the probability of the ECB's first 25 basis point rate hike this month has exceeded 90%, with a second hike expected in September. If core inflation in the Eurozone shows resilience amid supply chain disruptions, market expectations for future monetary tightening may be further strengthened. Meanwhile, yield spreads in peripheral countries have also fluctuated, with Italy's 10-year government bond yield (IT10Y) rising 3 basis points to 3.84% on Monday, and the spread between Italian and German bonds remaining at 76.21 basis points, highlighting the market's risk aversion in a tightening environment.
