Euro zone bond yields slip as Iran hints at Hormuz reopening

Euro zone government bond yields declined for a second consecutive session on Tuesday, with Germany's benchmark 10-year yield touching its lowest level in almost two weeks after Iran signalled the Strait of Hormuz could reopen if the United States eases military pressure.

The German 10-year yield slipped 1 basis point to 3.441%, having earlier risen as much as 4 basis points. It had dropped 7 basis points on Monday to its lowest since September 10 as energy prices retreated.

A senior Iranian official said the strait, which carried about a fifth of global energy supplies before the war, could reopen within seven days if Washington also lifts its blockade of Iranian ports. The official added that Iran's delegation to a United Nations meeting in New York this week has full authority to revive diplomacy over the conflict.

Oil prices fell after Japan's Kyodo news agency first reported the Iranian position and extended losses following the official's remarks. Brent crude futures dropped 2% to $98 a barrel, their lowest in two weeks. Prices were also pressured by a report that Saudi Arabia had restarted its East-West Pipeline at a low rate after drone attacks forced its closure earlier this month.

The decline in energy costs helped pull yields lower globally after a surge in recent weeks fuelled by expectations of further interest-rate hikes to combat energy-driven inflation. Traders are now pricing in around 35 basis points of additional European Central Bank tightening this year, down from 40 basis points on Friday.

Germany's two-year bond yield, which is sensitive to interest-rate expectations, fell 3 basis points to 3.174%, following a 6-basis-point drop on Monday.

Rabobank senior rates strategist Lyn Graham-Taylor said lower oil prices following the Iranian comments were weighing on bond yields.

Tensions in the Middle East remain elevated, however, with Houthi fighters pushing to seize more Saudi-held territory in Yemen. The rapid advance by the Iran-backed group has widened the regional conflict in recent weeks.

French government bonds underperformed their peers as investors continued to focus on France's budget debate and the run-up to the 2027 presidential election. The spread of French over German 10-year yields rose 2 basis points to 104 basis points. The gap, a gauge of the risk premium attached to French debt, hit its highest since 2012 on Friday at 105 basis points but fell on Monday as yields dropped.