Eurozone Bond Yields Rise to Multimonth Highs as Brent Surpasses $100 Again

By Emese Bartha

Yields on European government bonds rose to multimonth highs on Friday as Brent crude oil prices jumped above $100 due to the Middle East war, exacerbating worries about inflation.

The U.S.-Israel war with Iran continued unabated, with the Strait of Hormuz remaining effectively closed for shipping, disrupting energy delivery out the Gulf Arabic region.

Investors have become increasingly nervous about the risk of much higher inflation due to rising energy prices, which will likely in turn hamper economies. This is a bad combination for bonds.

The German 10-year Bund yield rose to a two-and-half-year high of 2.994% in early European trade, according to LSEG, as Brent crude oil prices briefly rose above $102 a barrel.

Uncertainty over developments in the Middle East suggest investors should avoid buying Bunds, Commerzbank rates strategists Hauke Siemssen and Erik Liem said in a note.

Spreads between yields of other eurozone government bonds over Bunds widened as investors became increasingly wary of more indebted countries such as Italy and France. Yields on U.K. 10-year government bonds hit a six-and-half-month high of 4.813%, Tradeweb data showed.

"If the [Middle East] situation does not de-escalate, continued pressure on inflation expectations is the most likely force that could push the 10-year Bund yield higher," Luca Cazzulani and Francesco Maria Di Bella, fixed-income strategists at the Investment Institute by UniCredit, said in a note.

Eurozone bond yield spreads over Germany widened, albeit in a contained manner.

The 10-year French OAT-German Bund yield spread widened by 1.7 basis points to last trade at 69 basis points, while the 10-year Italian BTP-German Bund yield spread increased 2.5 basis points to 81 basis points, according to Tradeweb.

"Should risk sentiment sour further, we could see spillovers in the form of wider eurozone government-bond spreads," ING rates strategists said in a note.

Relentlessly elevated oil prices and their potential implications for both inflation and economic growth will present problems for European Central Bank rate-setters at next week's meeting.

Rates are expected to stay on hold. The possibility of cutting rates to support the economy if it needs it now looks off the table and instead the ECB could be forced to raise rates to tame inflationary pressures.

"Clearly, the ECB's March meeting is going to be dominated by discussions surrounding the conflict in Iran," analysts at RBC Capital Markets said in a note.

Eurozone money markets currently price in almost two 25-basis-point rate rises by the ECB this year, with an increase fully priced in for July, according to LSEG data.

The 10-year Bund yield last traded 0.8 basis point higher on the day at 2.952%.

Write to Emese Bartha at [e-mail]

(END) Dow Jones Newswires

03-13-26 0728ET