Germany’s 10-year Bund yield fell below 3.1%, its lowest level since July 15, as a steep drop in oil prices eased inflation worries. Crude has declined about 10% this week amid rising optimism that the US and Iran could reach an agreement to end their five-month confrontation and reopen the Strait of Hormuz.
US President Donald Trump said the two sides were engaged in “very good discussions,” bolstering hopes for a resolution to a dispute that has significantly disrupted energy supplies from the Middle East. The prospect of improved oil flows has pushed crude prices lower, tempering concerns about renewed inflationary pressures and a drag on economic growth.
The fall in energy prices has also strengthened expectations that the European Central Bank will adopt a more gradual path for policy tightening. Markets now fully price in only one additional ECB rate increase by year-end, with roughly a 40% probability assigned to a second move. The ECB raised rates in June but left policy unchanged at its most recent meeting.
