Eurozone Bond Yields Surge as Middle East Conflict Fears Mount

The Eurozone's long-term government bond yields reached multi-year highs as concerns about a prolonged conflict in the Middle East led investors to worry about inflation and defence spending. This, in turn, increased pressure on bond markets.

Germany's 10-year Bund yield climbed to 3.21%, its highest since May 2011, while France's 10-year government bond yields rose to 4.05%, a level not seen since June 2009. Italy's 10-year bond yield also increased, reaching 4.0%.

Market participants pointed out that US President Donald Trump has signalled a strategy relying on economic pressure through a naval blockade of Iran rather than direct military action. This led Geoffrey Yu, strategist at BNY, to comment: 'The risk of renewed escalation and prolonged disruption to Gulf trade remains firmly in place.'

The European Central Bank deposit rate is expected to rise to 2.76% by March 2027, according to money markets, with a more than 90% chance of a September rate hike. However, some analysts are cautious about the need for multiple hikes, citing low oil prices and the absence of major supply outages.