Germany’s 10-year Bund yield pared its gains to 3.09% after weaker-than-expected US inflation data for June dampened expectations of further Federal Reserve rate hikes this year. Nonetheless, the yield remained at its highest level since May 21, as escalating tensions in the Middle East stoked fears that rising energy prices could reignite inflation and force interest rates higher.
The two-year Bund yield, which is more sensitive to changes in policy rate expectations, also climbed to 2.8%, its highest level since July 2024. Geopolitical risk intensified as the US military continued strikes against Iran, following President Donald Trump’s decision to reinstate a blockade on Iranian shipping and propose a 20% fee for securing passage through the Strait of Hormuz, adding to uncertainty over global energy supplies.
In response, markets increased their bets on further European Central Bank tightening. Money markets are now pricing in a rise in the ECB deposit rate to 2.70% by December, up from the current 2.25%, and are fully anticipating a rate hike in September.
