Eurozone bond yields rise as investors weigh US-Iran deal prospects

Euro area government bond yields rose on Monday as investors remained cautious about the possibility of a US-Iran agreement that could lead to the reopening of the Strait of Hormuz.

Market participants viewed developments in the Middle East as significant for inflation expectations and future European Central Bank (ECB) policy decisions.

Borrowing costs moved in line with oil prices, which were up 2.5% on Monday but remained below $95 per barrel.

Oil prices are widely watched by investors as an indicator of future inflation pressures.

Markets monitor Iran developments

Geopolitical developments remained in focus after the United States said it had struck Iranian military sites over the weekend.

Iran's Revolutionary Guards said on Monday that they had targeted a US base in response.

Despite the escalation, US President Donald Trump reiterated that Iran was interested in reaching an agreement.

Investors appeared reluctant to react strongly to comments from Washington without further confirmation from Tehran.

"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 US administration," Paul Donovan, chief economist at UBS Global Wealth Management, said.

ECB rate expectations increase

Money markets continued to price in higher ECB interest rates over the coming months.

Traders are currently pricing the ECB deposit rate at 2.60% by December, compared with the current level of 2%.

This was slightly above the 2.53% level priced in on Friday.

Markets were also indicating around an 80% probability of an initial rate increase later this month.

German two-year government bond yields, which are particularly sensitive to interest-rate expectations, rose 6 basis points to 2.59%.

The yield had previously reached 2.771% in late March, marking its highest level since July 2024.

Hopes for Strait of Hormuz normalisation

Some analysts said investors continue to expect progress toward restoring normal shipping activity through the Strait of Hormuz.

The waterway remains a critical route for global energy supplies, making developments there closely watched by financial markets.

Inflation and growth data in focus

Alongside geopolitical events, investors are assessing economic data for signs of how higher energy costs are affecting the eurozone economy.

Attention is also turning toward next week's ECB policy meeting.

Preliminary data released on Friday showed inflation in the euro zone's four largest economies remained above the ECB's 2% target for a third consecutive month in May.

At the same time, manufacturing growth lost momentum during May.

Demand for goods remained stagnant, while supply-chain disruptions linked to the Middle East conflict pushed input costs to their highest level in four years.

These developments have reinforced concerns that inflation pressures may remain elevated even as economic activity shows signs of slowing.

Benchmark bond yields move higher

Germany's benchmark 10-year government bond yield rose 5 basis points to 2.98%.

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

Italian government bonds also came under pressure.

Italy's 10-year yield increased 6 basis points to 3.71%.

The spread between Italian and German 10-year bonds stood at 71 basis points.

The gap was 63 basis points before the attack on Iran.

It reached 103.62 basis points in late March, marking its highest level since June 2025.

The moves reflected ongoing investor caution as markets balance geopolitical risks, inflation concerns, and expectations for future ECB policy action.