Key Takeaways:
A coordinated selloff in Eurozone government debt pushed yields higher across four major economies as geopolitical risk and ECB tightening expectations converged.
Eurozone sovereign bond yields rose more than 2 basis points across France, Italy, Spain and Greece on Monday, as escalating Middle East hostilities reinforced expectations for two additional ECB rate hikes by early 2027.
"Despite the resurfacing tensions in the Middle East and rising oil prices, these remain somewhat below the June baseline assumptions and signs of second-round effects remain limited," said Giada Giani, an economist at Citi.
France's 10-year yield climbed 2.2 basis points to 3.948 percent, while Italy's rose 2.7 basis points to 3.96 percent and Spain's added 2 basis points to 3.609 percent. Greece's 10-year yield gained 2.2 basis points to 3.872 percent. Germany's 2-year yield, the most sensitive to ECB policy expectations, touched 2.8174 percent — its highest level since July 2024 — before settling flat at 2.78 percent. The yield gap between Italian and German 10-year bonds widened to 80 basis points, up from 63 basis points in February before the attack on Iran, though below the March peak of 103.62 basis points.
Money markets now price the ECB deposit rate at 2.67 percent in December and 2.75 percent by February 2027, implying two quarter-point increases from the current 2.25 percent, with a September rate hike fully priced. The ECB meets later this week and is expected to leave interest rates unchanged, but the repricing of the rate path threatens to raise borrowing costs across the currency bloc.
The correlation between oil prices and eurozone front-end bond yields — a dynamic that dominated market moves through March, April and May — has resurfaced in recent trading, analysts at Societe Generale said. While crude oil prices remain below the spring highs, refined products such as diesel and gasoline are trading as if oil were at $110 to $120 per barrel, the bank noted. Brent crude was last down 0.15 percent at $88 per barrel after Iran's foreign ministry signaled that negotiations with the U.S. could be pursued based on national interests.
An ECB survey published Monday showed eurozone firms expect selling prices to rise more moderately and anticipate a slowdown in wage growth, adding to evidence that the energy-driven inflation surge has yet to generate sustained second-round price impacts. "For the ECB, a saving grace is that this still mostly an oil story and not a gas or electricity one, though prices are creeping higher there too," Societe Generale said.
The last time the German 2-year yield traded above 2.80 percent was in July 2024, preceding a period of elevated volatility in eurozone rate markets as the ECB navigated between sticky services inflation and weakening growth. If oil prices sustain their recent gains, the repricing of ECB rate expectations could accelerate, pushing peripheral bond spreads wider and increasing borrowing costs for the bloc's most indebted members.
This article is for informational purposes only and does not constitute investment advice.
