Eurozone bond yields climb to multi-year highs on geopolitical and fiscal worries

Long-dated eurozone government bond yields pushed to multi-year highs on Monday, as investors weighed the prospect of a prolonged Middle East conflict against persistent inflation and rising government spending needs.

Germany's 10-year Bund yield rose 1.5 basis points to 3.2158%, its highest level since May 2011. Two-year yields, which are more sensitive to interest rate expectations, were broadly flat at 2.79%.

French bonds remained under pressure, with the 10-year yield up 1 basis point to 4.0535% — the highest since June 2009. The 30-year yield touched 4.8193%, a level not seen since September 2008. The gap between French and German 10-year yields stood at 83 basis points, close to its widest since October 2025.

Investors are concerned that sustained geopolitical tensions could keep inflation elevated and force governments to increase defence spending, adding to debt issuance. A senior Iranian official said Tehran would escalate tensions in the Strait of Hormuz and the wider region if diplomacy with the United States failed, signalling a shift towards a more offensive posture.

"The Middle East conflict remains in strategic limbo," said Wee Khoon Chong, a macro strategist at BNY. "President Trump has signalled a lower-key approach, relying on economic rather than military pressure on Iran."

Money markets now price in a European Central Bank deposit rate of 2.76% by March 2027, up from the current 2.25%, and imply a more than 90% chance of a rate hike in September. However, some analysts see limited scope for aggressive tightening.

"We see it as a maximum one hike from the ECB," said Mohit Kumar, an economist at Jefferies. "Oil prices are currently lower than any of the adverse scenarios that the ECB presented in June and there is no need to deliver a series of hikes."

Oil prices, a key inflation driver, were mixed as investors monitored diplomatic efforts, though the absence of major supply disruptions capped gains.

Italy's 10-year yield rose 2 basis points to 4.01%, while its 30-year yield hit 4.8193%, the highest since November 2023. The spread over German Bunds stood at 77 basis points, compared with 63 basis points in February before the attack on Iran and a recent peak of 103.62 basis points in late March.