Euro area government bond yields rose sharply on Monday as hopes of an imminent U.S.–Iran deal faded, with borrowing costs tracking moves in oil prices – which rose more than 5%.
The U.S. said it struck Iranian military sites at the weekend and Iran’s Revolutionary Guards said on Monday they had targeted a U.S. base in response, but President Donald Trump reiterated that Iran really wanted to make a deal.
Yields rose further after the Iranian Tasnim news agency reported a halt in messaging with Washington through mediators in response to Israel’s operations in Lebanon.
Israeli Prime Minister Benjamin Netanyahu ordered attacks on Beirut’s Hezbollah-controlled southern suburbs on Monday, with both the Iran-backed group and Israel accusing each other of ceasefire violations.
Germany’s 2-year yields <DE2YT=RR>, which are sensitive to expectations for policy rates, rose 11 basis points (bps) to 2.635%. They reached 2.771% in late March, the highest since July 2024.
Money markets were last pricing in around 65 bps of ECB monetary tightening this year, up from around 55 bps on Friday.
Traders also saw a rate hike this month as almost certain. The main ECB rate is currently 2%.
“A jaded cynicism has come over investors, and in the absence of a definite statement from Iran there is a tendency to downplay comments from the U.S. administration,” Paul Donovan, chief economist at UBS Global Wealth Management, said.
“Ultimately, hopes prevail that a possible framework agreement will pave the way for gradually normalising traffic in the Strait of Hormuz,” Rainer Guntermann, economist at Commerzbank, said.
Germany’s 10-year government bond yield <DE10YT=RR>, the euro area’s benchmark, jumped 8 bps to 3.014%. It reached 3.13% in late March, its highest level since June 2011.
Italy’s 10-year government bond yields <IT10YT=RR> rose 10 bps to 3.755%.
The moves pushed the yield gap of Italian government bonds versus bunds <DE10IT10=RR> up to 73 bps. It was at 63 bps before the attack on Iran and hit 103.62 in late March, the highest level since June 2025.
Investors are also monitoring macroeconomic data ahead of next week’s ECB policy meeting.
ECB survey data on Monday showed euro zone consumers kept steady or lowered their inflation expectations in April in a sign that expectations of spiralling prices are not becoming embedded in the economy.
Meanwhile, growth in manufacturing lost momentum in May as demand for goods stagnated and supply-chain disruptions linked to the Iran war pushed input costs to their highest in four years.
(Reporting by Stefano Rebaudo and Harry Robertson)
