Eurozone Bond Yields Set for First Weekly Increase Since Mid-May

SadaNews Economy - Eurozone government bond yields are on track to record their first weekly increase since mid-May, as investor caution rises regarding the prospects of a swift agreement between the United States and Iran to reopen the Strait of Hormuz, keeping geopolitical risks present in the markets.

Political developments came after Hezbollah rejected a new ceasefire in Lebanon on Thursday, complicating diplomatic efforts led by U.S. President Donald Trump's administration to de-escalate tensions and reach a broader settlement with Tehran, according to Reuters.

Analysts believe that any progress towards reopening the Strait of Hormuz could alleviate inflationary pressures from rising energy prices and reduce expectations for interest rate hikes from central banks, which could negatively impact bond yields.

The yield on two-year German bonds, which are most sensitive to monetary policy expectations, fell by 0.5 basis points to 2.65 percent, on track for weekly gains of around 12 basis points. The yield had reached 2.771 percent at the end of March, its highest level since July 2024.

Financial markets indicate that the European Central Bank's deposit interest rate could reach 2.65 percent by December, reflecting pricing for two rate hikes, with nearly a 60 percent chance of a third additional hike. Markets are also pricing in about a 90 percent likelihood of a rate hike at the next meeting, followed by another increase in September.

The yield on 10-year German bonds, the key benchmark for the Eurozone, remained stable at 3.02 percent, heading towards weekly gains of about 9 basis points. It had reached 3.13 percent at the end of March, its highest level since June 2011.

Investors are awaiting the release of the U.S. employment report later in the session, which could provide additional signals regarding the Federal Reserve's monetary policy path.

The yield on 10-year Italian bonds rose by 1.5 basis points to 3.83 percent, while the yield spread between Italian and German bonds stood at 73 basis points.