Euro zone government bond yields rise as US-Iran talks stall

Euro zone government bond yields rose on Wednesday, with traders now pricing in a more than 50% chance of three European Central Bank rate hikes by year-end as hostilities flared in the Middle East and U.S.-Iran peace talks stalled.

Investors were sceptical about the prospect of a quick U.S.–Iran deal that could lead to the reopening of the Strait of Hormuz, a move that would likely ease inflationary pressures.

Oil prices rose for a third day running to a one-week high on Wednesday.

Money markets are pricing the ECB deposit rate at 2.67 % by December EURESTECBM5X6=ICAP, which implies two rate hikes and an about 65% chance of a third move. They also indicated a 90% chance of a first rise this month. EURESTECBM1X2=ICAP

Germany’s 2-year yields <DE2YT=RR>, more sensitive to expectations for policy rates, rose 3 basis points to 2.65%. They reached 2.771% in late March, the highest since July 2024.

Investors are also monitoring macroeconomic data for early signs of how the energy shock is affecting the economy.

Germany’s 10-year government bond yield <DE10YT=RR>, the euro area’s benchmark, was up 2.5 bps at 3.00%. It reached 3.13% in late March, its highest level since June 2011.

Italy’s 10-year government bond yields <IT10YT=RR> rose 3 bps to 3.73%.

The yield gap of Italian government bonds versus bunds <DE10IT10=RR> was at 70 bps. It was at 63 bps before the attack on Iran and hit 103.62 in late March, the highest level since June 2025.

-Stefano Rebaudo/Reuters