Bund yields edge higher as oil surge stirs ECB bets

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Euro zone government bond yields were on course for a weekly increase, even after experiencing their steepest drop in years earlier this week.

The move comes as geopolitical tensions surrounding a ceasefire between the United States and Iran continue to show signs of strain, keeping markets on edge.

Borrowing costs across the region largely tracked movements in oil prices.

The recent surge in energy prices has heightened inflation concerns, prompting investors to reassess expectations for monetary tightening by the European Central Bank.

The uncertainty has been compounded by ongoing disruptions in global energy supply.

There were no indications that Iran would ease its near-total blockade of the Strait of Hormuz, a key passage for global oil shipments.

This blockade has triggered what is described as the worst-ever disruption to global energy supplies, further fuelling price pressures.

Rising oil prices have, in turn, reinforced expectations that central banks may need to act more aggressively to contain inflation.

Ceasefire outlook remains fragile

Mohit Kumar, an economist at Jefferies, offered a cautiously optimistic view on the geopolitical situation.

He said, "We maintain our view that the ceasefire will hold, not because we are any closer to a solution but because it is in the interest of both parties not to continue with the war."

Kumar added that "Trump does not have support of his Make America Great Again base,"

While the "Islamic Revolutionary Guard Corps wants to consolidate its grip over the country and further war will lead to economic destruction which can lead to a potential rebellion down the line."

Bond market movements across Europe

Germany’s 10-year government bond yield rose by 1.5 basis points to 3.03% and was set for a weekly increase of 3 basis points.

The benchmark yield had earlier reached 3.13% in late March, marking its highest level since June 2011.

Shorter-term yields, which are more sensitive to monetary policy expectations, showed a different trend.

Germany’s two-year yield rose by 1 basis point to 2.56%, though it remained on track for a weekly decline of 6.5 basis points.

In southern Europe, Italy’s 10-year bond yield climbed 2 basis points to 3.81%.

It had previously touched 4.142% in late March, the highest level since July 2024.

Meanwhile, the yield spread between Italian bonds and German Bunds narrowed to 77 basis points, after widening significantly during the recent conflict.

ECB rate expectations adjust

Money markets are currently pricing in an ECB deposit facility rate of 2.60% by year-end.

This implies expectations of two rate hikes, along with a 40% probability of a third increase.

Prior to the ceasefire announcement earlier in the week, markets had been anticipating three full rate hikes. The ECB’s deposit rate currently stands at 2%.

Barclays noted in a research update that "a sustained decline in oil price is a necessary condition for further removal of rate hike pricing but some residual hike premium is likely to remain."

Focus shifts to US inflation data

Investors are now turning their attention to upcoming US inflation data for March, which is expected to provide initial insights into how energy price shocks are feeding into broader price levels.

Analysts suggest that the Federal Reserve will be particularly focused on second-round effects, where higher energy costs begin to influence wages and pricing behaviour more broadly.

These effects typically emerge with a lag, meaning the upcoming data release may not significantly alter policy expectations unless it shows a substantial upside surprise.

As markets digest geopolitical developments and incoming economic data, volatility in bond yields is likely to persist in the near term.