Euro Zone Bond Yields Near 15-Year Highs Amid Middle East Conflict Fears

The European Central Bank (ECB) is facing growing pressure to raise interest rates as euro zone government bond yields hover near 15-year highs. The current inflation fears are fueled by the ongoing Middle East conflict, which has led to a surge in energy prices.

Germany's benchmark 10-year Bund yield remained steady at 3.20%, its highest level since May 2011. The two-year German yield was also unchanged at 2.79%. Investors have become increasingly cautious about the inflation outlook due to the uncertainty surrounding the conflict.

The ECB deposit rate is now priced in at around 2.76% by March 2027, up from the current 2.25%. This marks a significant shift from earlier expectations of a stable or easier monetary policy path. Rising energy costs and the risk of a prolonged disruption to oil supplies have raised the possibility that the ECB could be forced to keep policy restrictive for longer.

Jefferies economist Mohit Kumar expects the ECB to deliver no more than one rate increase, arguing that current oil prices remain below the adverse scenarios considered by the central bank in June. However, investors are closely watching developments in the conflict alongside incoming economic data for signs of whether the energy shock is broadening into wider price pressures.