Eurozone government bond yields edge higher as markets weigh Hormuz outlook and inflation data

⑴ Eurozone government bond yields edged higher across the board on Monday, after having recorded their largest weekly drop since June the previous week, as investors remained on the sidelines ahead of negotiations over the Strait of Hormuz and the release of US inflation data. ⑵ Iran reiterated that the US must meet additional conditions for a possible deal, including compensation, lifting sanctions, and removing military threats, which kept market sentiment cautious regarding the agreement’s prospects and limited further buying of safe-haven assets. ⑶ The German 2-year yield rose by 2 basis points to 2.75%, while the 10-year yield inched up 0.5 basis points to 3.14%. Citi analysts pointed out that US Treasury data failed to push German bunds out of the 3.1%-3.2% monthly trading range, and noted that natural gas prices’ impact on winter inflation and ECB rate hike expectations is becoming a key factor. ⑷ Money markets are pricing in a European Central Bank deposit rate of 2.72% by March 2027, up from the current 2.25%. If Wednesday’s US CPI data comes in moderate, it could ease concerns about a dovish turn by the Federal Reserve and drive long-end yields lower. ⑸ The spread between Italian and German 10-year yields is around 74.5 basis points, while the France-Germany spread is at 78 basis points. Although geopolitical premiums have retreated from March highs, they remain above pre-war levels.