Euro zone bond yields ease on oil dip, stay near multi-year highs

Euro zone government bond yields edged lower on Monday, helped by a dip in oil prices, but remained close to multi-year highs reached last week as investors braced for details of threatened U.S. sanctions on Iran.

Germany's 10-year yield, the euro zone's benchmark, was down 1 basis point at 3.246%. It had climbed to 3.275% last week, its highest level in more than 15 years, as inflation concerns and fiscal worries gripped markets. Bond yields move inversely to prices.

"I have a difficult time seeing yields coming down in any meaningful way unless we have a more sustainable solution to the Iran conflict, and that is not in sight for the time being," said Jussi Hiljanen, chief strategist for U.S. and euro zone rates at SEB.

Brent crude oil prices fell around 1.5% to $92.91 on Monday, providing some relief to bonds after oil rose by more than 6.5% last week. However, the outlook remains uncertain ahead of a press conference by U.S. Treasury Secretary Scott Bessent, who plans to announce sanctions on Iran that aim to inflict economic pain and could further disrupt energy supplies from the Middle East.

ECB Watch

Higher energy prices have prompted markets to price in increasingly tighter policy from the European Central Bank, with tighter supplies of refined fuels and dwindling gas inventories threatening to push inflation even higher.

Markets are almost fully pricing in a quarter-point rate hike to 2.5% from the ECB next month. Futures also imply a roughly 25% chance that the ECB's deposit rate reaches 3% by March 2027 and about a 60% chance by September.

Germany's 2-year yield, which is sensitive to changes in ECB policy expectations, was down 1.5 basis points to 2.823%.

"We'll need to see lower energy prices which will then feed into policy rate expectations," said SEB's Hiljanen. "That is the key channel for yields."

Long-End Worries

Investors were also closely watching moves at the longer end of the yield curve, with yields touching multi-decade highs across the globe last week, in part due to worries about fiscal sustainability.

Germany's 30-year yield was down half a basis point on Monday to 3.756%, just below its highest level in more than 15 years of 3.787% reached last week.

Other countries in the euro zone faced similar moves, with France's 30-year OAT yield touching its highest level since September 2008 last week. It was last down 2 basis points on the day to 4.894%.

"In Europe, long-end OATs are particularly exposed given looming budgetary and election uncertainty," said Commerzbank rates strategist Hauke Siemssen.

U.S. 30-year bond yields were down 3 basis points at 5.248%, below last week's 19-year high of 5.337% that prompted the U.S. Treasury to expand purchases of older long-dated bonds.