Germany's 2-year bond yield, sensitive to European Central Bank (ECB) rate expectations, increased by 9 basis points to 2.676% on Wednesday, marking its highest level since June 11. This surge was in response to President Donald Trump's declaration that the memorandum of understanding with Iran was "over," which caused oil prices to jump significantly.
Traders reacted to the news by increasing their bets on further ECB rate hikes. Money markets are now pricing in 36 basis points of additional monetary tightening by the end of the year, a substantial increase from the 25 basis points predicted on Tuesday. This indicates a heightened expectation of more aggressive interest rate increases from the ECB.
The broader euro zone bond market also saw steep yield increases, with yields rising 8-12 basis points across the board. Germany's 10-year bond yield climbed 8 basis points to 3.068%, also its highest since June 11. Similarly, Italy's and France's 10-year bond yields were both up 12 basis points. The primary driver was a 6% jump in international benchmark Brent crude to $78.40 a barrel, its highest in two weeks, following Trump's comments and the revocation of a license allowing Iran to sell oil. This rise in energy prices fueled concerns about renewed inflation.
