Euro zone yields rise on US-Iran ceasefire worries

LONDON: Euro zone bond yields rose on Monday, as concerns grew that the ceasefire between the United States and Iran might not hold, though borrowing costs were still meaningfully below their late March highs hit before the ceasefire was announced.

Germany’s 10-year bond yield, the benchmark for the euro zone, rose 3 basis points to 2.99%. Rate-sensitive two-year yields rose nearly 5 bps to 2.47%.

Efforts to build a more lasting peace appeared to be on shaky ground, as Iran said it would not participate in a second round of negotiations that the US had hoped to kick off before the ceasefire expires on Tuesday.

In the short term, the US said it had seized an Iranian cargo ship that tried to run its blockade and Iran vowed to retaliate.

That sent benchmark Brent crude futures up 6.6% on the day to $95 a barrel, underscoring worries for bond investors that sustained high energy costs could force central banks to hike rates to prevent a broader surge in inflation.

Money markets see a small chance of a European Central Bank rate hike later this month, but see a 25 bp hike as likely by June and are close to fully pricing two such moves by year-end.

Before the war, markets thought the ECB would remain on hold this year, but with a possibility of a rate cut. However, at times in March they were pricing three 25-bp rate hikes, sending Germany’s two-year yield as high as 2.77%.

Italian bonds underperformed the German benchmark on Monday, with its 10-year yield up 6 bps to 3.74% and its 2-year yield nearly 5 bps higher to 2.66%.