Euro zone bond yields set for sharpest weekly drop since June as Hormuz hopes fade

Euro zone government bond yields are on course for their largest weekly decline since late June, driven by hopes that the Strait of Hormuz could be reopened soon. That optimism helped cool oil prices and eased inflation concerns, prompting investors to slightly reduce their expectations for further European Central Bank (ECB) rate hikes.

US President Donald Trump told reporters on Thursday that he believed the war with Iran would end soon. However, borrowing costs rose for a second straight day on Friday as oil prices ticked up and the latest signals suggested US-Iran tensions have not yet fully subsided.

The German two-year yield, which is highly sensitive to interest rate expectations, climbed 2 basis points to 2.76% but remains on track for a 5.5-basis-point weekly fall. The benchmark 10-year German yield was up 2 basis points at 3.14%, heading for a 6-basis-point weekly drop.

Money markets have scaled back bets on the ECB deposit rate, now pricing it at 2.72% by March 2027, down from the current 2.25%. Late last week, markets had indicated a deposit rate of around 2.80%.

Investors are also awaiting US employment data due later in the session, which could influence expectations for the Federal Reserve's rate path.

The yield spread between Italian and German bonds stood at 76 basis points. That gap was 63 basis points in February before the attack on Iran and widened to 103.62 basis points in late March, the widest since June 2025.