Germany’s 10-year Bund yield hovered around 2.85%, its highest level since February 4, as investors weighed the inflation risks arising from the escalating conflict in the Middle East. The benchmark yield is on track for a weekly increase of 20 basis points, its largest rise since March of last year, when Germany announced plans for a substantial increase in fiscal spending.
The deepening regional conflict has heightened fears of disruptions to global crude oil supplies, driving energy prices higher and threatening to keep inflation elevated across Europe. This, in turn, has strengthened expectations that the European Central Bank may adopt a more restrictive monetary policy stance.
On Thursday, several ECB policymakers warned that a prolonged war in Iran drawing in additional countries could push eurozone inflation higher while simultaneously undermining economic growth. Money markets are currently pricing in a 60% probability of an ECB rate hike in December and a 90% chance of at least one increase by June 2027.
