Eurozone government bond yields rose on Monday after the failure of peace talks between the United States and Iran. The situation has raised concerns about energy-driven inflation, as Brent crude oil prices surged back above $100 a barrel. Investors are now adjusting their positions to the risk of a longer oil supply disruption.
The shift in sentiment has led money markets to predict a 70% probability of the European Central Bank (ECB) implementing a third interest rate hike by December. Previously, market expectations were lower, but the threat of US maritime sanctions on Iran has forced market pricers to brace for tighter monetary policy to curb inflation.
The yield on Germany’s 10-year bond, Europe’s main benchmark, rose to 3.06%, nearing its highest level in more than a decade. While energy price shocks risk hurting economic growth, analysts see the ECB remaining hawkish. Short-term bonds that are more sensitive to interest rates also showed significant gains.
In the Italian bond market, yields jumped to 3.86% as investors saw the Italian economy as more vulnerable to energy price fluctuations than other European countries. However, the yield differential between Italian and German bonds remained below its March peak, suggesting markets still had some confidence in regional stability.
Despite the heightened tensions, international economists say the world economy is now more resilient than during the oil crisis of the 1970s. A reduction in global reliance on crude oil is expected to reduce the impact of economic damage if the conflict continues. Attention is now on the ECB's decision in April to see how the Iran crisis will affect their actions.
