France’s 10-year OAT yield rose back above 3.4%, its highest level since February 9, as investors refocused on inflation risks against the backdrop of a rapidly worsening Middle East conflict. Tensions escalated sharply following reports that a US submarine sank an Iranian warship near Sri Lanka and that NATO air defenses intercepted an Iranian ballistic missile targeting Turkey.
The resulting jump in energy prices is expected to keep inflationary pressures elevated across Europe, reinforcing expectations that the European Central Bank will maintain a hawkish policy stance. February data underscored these concerns: euro area headline inflation came in at 1.9% year-on-year and core inflation at 2.4%, both above consensus forecasts.
In response, market pricing has shifted notably. Investors now assign roughly a 40% probability to an ECB rate hike by year-end—reversing last week’s similar odds of a rate cut—and see around a 60% chance of a hike by June 2027.
