Euro zone bond yields fall to two-week low on Iran deal

LONDON: Euro zone bond yields fell on Monday after the US and Iran reached a preliminary deal to end their war and reopen the key Strait of Hormuz, driving oil prices sharply lower.

Germany’s 10-year bond yield, the benchmark for the euro zone, fell 4 basis points (bps) to 2.957%, its lowest since 2 June.

The German two-year yield, which is sensitive to European Central Bank interest rate expectations, also fell 4 bps to a two-week low of 2.571%.

US and Iranian officials said they have reached an agreement to end the war in a preliminary pact that will lift the US blockade of Iran and crucially open the Strait of Hormuz, through which 20% of global energy typically flows.

Oil prices fell sharply, reducing the pressure on central banks to raise interest rates to tame inflation and helping bond yields fall around the world.

Brent crude oil, the global benchmark, was down 4% to $83.80, around its lowest since early March.

Money markets were pricing in around 32 bps of further monetary tightening from the ECB this year, down from over 40 bps after the central bank raised interest rates last Thursday.

“Details of the deal are not yet clear,” said Mohit Kumar, chief European economist at Jefferies, including whether the passage through the Strait would be free and the timeline over which sanctions would be lifted on Iran.

“But what the market cares is whether the Strait of Hormuz will be open and oil can start moving towards pre-war levels.”

Italy’s 10-year bond yield fell 4 bps to 3.693%.