German sovereign bond prices decreased on Wednesday, pushing the yield on the 10-year Bund up by five basis points to 2.99%, approaching 2.98% previously seen on June 19, the highest since early July. This movement was primarily driven by a surge in crude oil prices following reported attacks in the Strait of Hormuz and US airstrikes in Iran. Brent crude jumped over 3% to trade above $76 a barrel, while West Texas Intermediate crude rose 3.3% to $72.74 a barrel. This escalation in Middle East tensions and the revocation of a waiver allowing Iran to sell oil globally fueled inflation concerns, particularly given the drawing down of global inventories from months of conflict. Gold prices also rose 0.5% to $4,126.06 an ounce.
The increase in oil prices and the ongoing risk of second-round inflation have led traders to increase bets on European Central Bank (ECB) rate hikes. Analysts like Sean Keane, chief strategist for Asia Pacific at JB Drax Honore, suggest these developments strengthen the case for central banks to deliver precautionary rate hikes. Isabel Schnabel, an ECB official, warned that the Iran conflict's economic impact persists, with core inflation remaining strong, reinforcing expectations for a 25 basis point rate hike by the ECB this Thursday.
Simultaneously, Germany's cabinet approved a 2027 budget draft, planning €555.4 billion in spending and raising borrowing to €203.6 billion, an increase from April’s €196.5 billion estimate. While weak economic data from the Eurozone, such as a sharper-than-anticipated fall in German industrial orders in April, had little immediate impact on the bond market, economists like Commerzbank Chief Economist Jörg Krämer suggest that the German economy is likely to contract slightly in the second quarter, largely due to the Middle East conflict.
