Euro zone government bond yields fell on Monday, with investors concerned about the adverse economic impact of the Russian invasion of Ukraine while assessing European Central Bank's future monetary policy decisions.
A decision by Western allies on Saturday to block "selected" Russian banks from the SWIFT payments system will inflict a crippling economic blow and cause much pain to their own companies and banks.
President Vladimir Putin put Russia's nuclear deterrent on high alert on Sunday in the face of a barrage of Western reprisals for his war on Ukraine.
Germany's 10-year government bond yield, the benchmark of the bloc, dropped 5.5 basis points to 0.163%.
"As the targeted SWIFT ban still leaves EU countries with the option to settle commodity imports electronically and markets had already discounted an energy shock on Thursday, a Russian tit-for-tat seems required to push markets towards pricing an imminent inflationary recession," Commerzbank analysts said in a note to clients.
Some analysts expect the central bank to delay the tapering of its pandemic monetary stimulus unless a diplomatic solution to the Ukraine crisis is in sight.
"The conflict in Ukraine adds to the surge in 'unhealthy' inflation and leaves the ECB in an extremely difficult position," Citi analysts said in a research note.
"While a (interest rate) hike may feel more distant at the moment, the surge in inflation risks very much keeps normalisation in play," they added.
Germany's shorter maturities are outperforming, with the 2-year and the 5-year yield respectively down 8.5 and 9 basis points.
"Market jitters may well result in central bankers striking a more cautious tone," ING analysts said.
"Even with higher energy prices, we could see front end rates imply a more cautious tightening path, although long-dated bonds should still be the main recipient of safe-haven flows," they added.
Italian government bonds underperformed their peers, but with the closely watched spread between Italian and German 10-year yields at 164 bps below the recent widest of around 175 basis points.
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