Eurozone bond yields hover near multi-year highs as Middle East war stokes inflation fears
Eurozone bond yields stay near multi-year highs as Middle East conflict fuels inflation concerns, with markets pricing in ECB rate hikes.
Eurozone government bond yields remained pinned near their highest levels in over a decade on Monday, as the prospect of a prolonged Middle East conflict kept inflation concerns firmly in focus.
Germany's 10-year Bund yield held steady at 3.20%, just below the 3.2118% touched in late July — a level not seen since May 2011. Two-year yields, which are more sensitive to interest rate expectations, were broadly unchanged at 2.79%.
Money markets are now pricing in a European Central Bank deposit rate of 2.76% by March 2027, up from the current 2.25%, and imply a greater than 90% chance of a rate hike in September.
Analysts, however, 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, the primary driver of inflation, were mixed as investors weighed the lack of diplomatic progress against the absence of major supply disruptions. The conflict remains in a state of strategic uncertainty, with the US signaling a preference for economic pressure over military action against Iran.
The yield gap between Italian 10-year bonds and German Bunds stood at 77 basis points, having widened from 63 bps in February before the attack on Iran. It peaked at 103.62 bps in late March, the widest since June 2025.
French bonds continued to face pressure amid concerns over the country's fiscal trajectory ahead of the spring 2027 presidential election. France's 10-year yield slipped one basis point to 4.03%, after hitting 4.0448% on Friday — its highest since June 2009. Yields on 30-year French bonds reached 4.847%, a fresh 18-year high.
The spread between French OATs and German Bunds stood at 83 bps, close to its highest level since October 2025. Some analysts suggested that in a low-volatility environment, investors' search for yield could help limit any further widening.