Euro zone bond yields fall on cautious optimism over US-Iran deal

Euro zone government bond yields declined on Thursday, mirroring movements in oil prices, as a ceasefire deal between Israel and Lebanon raised hopes for a broader agreement to end the U.S.-Israeli war on Iran.

A U.S.-Iran agreement to reopen the Strait of Hormuz is expected to ease energy-driven inflationary pressures and dampen expectations for further central bank rate hikes.

U.S. President Donald Trump suggested on Wednesday that there could be progress in negotiations with Iran as soon as this weekend.

Germany’s 10-year government bond yield <DE10YT=RR>, the euro area’s benchmark, was down 1.5 basis points at 3.02%. It rose to 3.13% in late March, its highest level since June 2011.

Its 2-year yields <DE2YT=RR>, more sensitive to expectations for policy rates, dropped 2 bps to 2.65%. They reached 2.771% in late March, the highest since July 2024.

However, euro zone money markets are pricing the ECB deposit rate at 2.65% by December EURESTECBM5X6=ICAP, which implies two rate hikes and a 60% probability of a third move. They also indicated a 90% chance of a first rise this month. EURESTECBM1X2=ICAP

The ECB is set to raise its deposit rate to 2.25% on June 11, with another increase likely in September, as it balances energy-driven inflation against a weakening economy, a Reuters poll of economists showed.

Italy’s 10-year government bond yield <IT10YT=RR> was down 2 bps at 3.77%, with the yield gap of Italian government bonds versus Bunds <DE10IT10=RR> at 72 bps. It was at 63 bps before the U.S.-Israeli strikes on Iran in late February and hit 103.62 in late March, the highest level since June 2025.

-Reporting by Stefano Rebaudo; Editing by Emelia Sithole-Matarise/Reuters