By Emese Bartha
The yield on 10-year German government bonds, known as Bunds, rose to its highest level since 2011 on Thursday following a jump in oil prices that intensified worries about inflation and raised the prospect of increases in interest rates.
Yields on 10-year U.S. Treasurys and U.K. government bonds, known as gilts, also increased to one-month highs as oil prices surged to their highest since the start of the Middle East war on fears that the U.S. could resume military action against Iran.
The 10-year German Bund yield rose to 3.146%, the highest level since 2011, while the 10-year U.S. Treasury yield hit a one-month high of 4.436%, according to Tradeweb. The 10-year U.K. gilt yield also reached a one-month high of 5.082%.
Brent crude for June delivery last traded at $121.81, up 3.20% in European hours, having earlier surpassed $123 to mark its highest level since 2022.
Talks between the U.S. and Iran about a resolution to the war and about the reopening of the Strait of Hormuz have reached a stalemate. The Wall Street Journal reported that President Trump instructed aides to prepare for an extended naval blockade of Iran after saying that Tehran's proposal to reopen the strait and postpone nuclear talks proved the government wasn't negotiating in good faith.
Axios also reported that Trump is set to receive a briefing Thursday on new options for potential military action.
"Markets remain wary of renewed escalation risks in the Middle East with oil ratcheting higher," said Erik Liem, rates strategist at Commerzbank, in a note.
The rise in bond yields comes ahead of decisions Thursday by the European Central Bank and Bank of England, where policymakers could express concerns about risks to inflation and flag the potential need to raise rates as a result.
The Federal Reserve's policy meeting on Wednesday didn't help bond sentiment. The Fed left interest rates on hold at 3.50%-3.75%, as expected, with governor Stephen Miran dissenting for a rate cut. The surprise came, however, from three other Federal Open Market Committee members who supported the rate decision but voted against the inclusion of a bias towards cutting rates in future.
Money markets see only a small probability of a Fed rate cut this year, according to LSEG.
"We expect the Fed to keep rates steady until later this year, when we forecast a rate cut in one of the last three meetings of the year," said Reto Cueni, chief economist, Syz Group in a note.
However, this is based on the expectation that the Middle East conflict "will have de-escalated substantially towards the end of May (at the latest) and that energy prices will fall to more normal levels in the second quarter of the year," he said.
The ECB and BOE are both expected to leave policy rates on hold this month to gain more time to assess the impact of the Middle East war on both inflation and growth.
However, money markets continue to price in three interest-rate hikes in the eurozone and U.K. by the end of the year, LSEG data showed.
"Compared to the Fed, the ECB finds itself in a more difficult position," Commerzbank's Liem said. "The oil price momentum and activity data like the eurozone PMIs keep shifting the distribution towards more adverse Iran outcomes."
As for the Bank of England, the first effects of the Middle East energy price shock were evident in the March U.K. inflation data, which revealed a re-acceleration in inflation owing to the large month-on-month rise in fuel costs, said Grant Slade, economist at Morningstar, in a note.
"We expect inflation to remain elevated in coming quarters as the surge in energy prices observed since the beginning of the Middle East conflict permeates U.K. prices more broadly," he said.
Still, Morningstar expects the BOE will largely look through the temporary inflation spike and resist raising interest rates this year.
The BOE announces a decision at 1100 GMT, followed by the ECB at 1215 GMT.
Write to Emese Bartha at emese.bartha@wsj.com
(END) Dow Jones Newswires
04-30-26 0522ET
