Euro Zone Bond Yields Surge as Oil Prices Climb Amid US-Iran Tensions

The euro zone government bond yields rose on Monday as oil prices climbed due to the ongoing US-Iran conflict and doubts about the Strait of Hormuz reopening. Germany's 10-year bond yield, the euro zone benchmark, was up 1.8 basis points at 3.6416%, its highest level since June 2009. The continued impasse between the two countries pushed oil prices higher, with Brent crude futures up around 4% at $108.50 a barrel.

Rising energy prices and expectations of higher interest rates have kept pressure on government bonds globally in recent months. The European Central Bank has already raised rates twice this year to combat inflation, and money markets are pricing in at least one further increase by year-end. They also expect roughly 100 bps of further tightening by October 2027.

Nomura senior European economist Andrzej Szczepaniak said he would be 'very unsurprised to see a jump in headline inflation', citing data showing higher vehicle fuel prices amid elevated oil costs. He added that service-sector prices are unlikely to rise materially until wage growth accelerates.