Euro Zone Bonds Snap Rally on Rising Oil Prices Amid Middle East Tensions

The euro zone government bond market snapped its three-day rally on Wednesday as oil prices rose in response to the escalating conflict in the Middle East. The price of the 10-year German Bund dropped, causing its yield to increase by 1 basis point to 3.12%. This marks a turnaround from the past three sessions when the yield had fallen from its 15-year high of 3.212% reached on July 23.

European bonds have been trading in response to the war in the Gulf, which began in late February. The recent surge in oil prices has policymakers concerned about potential inflationary pressures and whether they will need to raise interest rates more aggressively. As Iran rejected regional joint management of the Strait of Hormuz on Wednesday, scuppering hopes for a resolution, Brent crude rose 3.5% to $87 a barrel.

The upcoming U.S. Federal Reserve meeting is also keeping investors on edge, with markets expecting the Fed to remain on hold but seeing a roughly 30% chance of a hike. This uncertainty has been described as 'the most uncertain that the market has been on whether the Fed will change rates going into a meeting since December 2018' by Jim Reid, global head of macro research at Deutsche Bank.