Euro zone bond yields steady as Gulf tensions ease
Investors were also awaiting the European Central Bank’s policy announcement on Thursday, when the ECB is expected to raise rates
Euro zone government bond yields were steady on Tuesday as easing tensions between Iran and Israel for now calmed fears that their weekend attacks could derail U.S. efforts to broker a peace deal to end the Middle East war.
Investors were also awaiting the European Central Bank’s policy announcement on Thursday, when the ECB is expected to raise rates since the Iran war unleashed an energy crisis and stoked inflationary pressures.
Iran and Israel said on Monday that they would end operations following an appeal from the U.S. president, as he attempts to secure a peace agreement that would get oil supplies flowing back through the Strait of Hormuz.
A reopening of the Strait could ease worries about energy supplies and reduce expectations for monetary tightening from some central banks.
Germany’s 10-year yield, the benchmark for the euro zone, was last at 3.051%, little changed on the day.
The ECB looks set to raise its key deposit rate by 25 basis points to 2.25% on Thursday, its first interest rate move in a year, but the main question for markets is what comes next.
There is a clear case for retaining a hawkish bias after such a hike, said Gavekal Research economists Cedric Gemehl and August Gudmundsson in a note.
With a single price stability mandate, the ECB’s instinctive response to a shock that has pushed realized and expected inflation above its 2% target will be to lean hawkish to preserve its inflation-fighting credibility, regardless of the nature of the shock, they said.
Money market futures are pricing in 68 basis points of tightening by the end of the year, implying one further quarter-point hike and a more than 70% chance of a third.
Germany’s two-year bond yield, which is sensitive to changes in ECB rate expectations, was down 2.5 bps at 2.677%, after hitting an almost three-week high of 2.734% on Monday.