Euro zone long-dated government bond yields hit multi-year highs as the prospect of a prolonged conflict in the Middle East raised concerns that inflationary pressures may prove more persistent.
Investors fear not only higher inflation but also a rise in defence spending if geopolitical tensions persist, increasing debt issuance and adding to pressure on bond markets.
Germany’s 10-year Bund yield was up one basis point to 3.21 per cent after reaching 3.2158pc, the highest since May 2011. The country’s two-year bond yields, which are more sensitive to interest rate expectations, were roughly unchanged at 2.79pc. Iran will conduct a military attack to break the US naval blockade on the Islamic Republic, a senior Iranian official told Reuters.
Market participants have noted US President Donald Trump has signalled a strategy that relies more on economic pressure through a naval blockade of Iran than on direct military action and described the current situation as a stalemate.
French bonds remain under pressure as investors fear France’s fiscal trajectory is unlikely to improve ahead of a presidential election scheduled for spring 2027. Some analysts argued that, in a low-volatility environment, investors’ search for yield could help limit any widening in the spread between French government bonds and safe-haven German Bunds.
France’s 10-year government bond yields were up 1.5 bps at 4.05pc, after hitting 4.0581pc, the highest level since June 2009. Yields on 30-year government bonds reached 4.8617pc, the highest since September 2008, up 2 bps on the day.
The yield gap between 10-year OATs and Bunds was at 84 bps, not far from its highest level since October 2025.
Money markets priced in a European Central Bank deposit rate of 2.76pc in March 2027, up from the current 2.25pc. They also implied a more than 90pc chance of a September rate hike.
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