Germany's 10-year bond yield, the benchmark for the euro zone, was last up 3.8 basis points to 3.0726%. It rose around 10 basis points in the course of last week, its biggest weekly rise since early June, after the renewed U.S.-Iran tensions heightened uncertainty about prospects for peace in the region and the outlook for inflation and interest rates.
Worries about the macro backdrop had previously been easing on hopes for a resolution of the conflict and energy costs easing.
The German 2-year bond yield, which is widely regarded as more sensitive to interest rate expectations, was up 6.6 bps to 2.7149% after earlier hitting 2.72%, its highest in a month. Last week, it notched its largest weekly rise since early June after climbing by 11 bps.
Money markets were last pricing in around 37 basis points of tightening from the European Central Bank by the end of the year, implying one more quarter-point interest rate hike and a close to 50% chance of a second. That was slightly higher than Friday's probability.
Expectations for further tightening have also been supported by recent comments from ECB officials who have suggested that inflation pressures remain even as energy prices have eased, Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a note.
"But despite the latest hawkish commentary from the ECB, we expect only one further rate increase rather than a sustained hiking cycle," he added.
Haefele said inflation data was moving in the right direction, with energy prices - an important source of inflation risk - still below recent peaks. He said gross domestic product growth still faced headwinds, which he indicated was also likely to constrain the extent of rate hikes.
While higher interest rates typically tame rising inflation, they can also weigh on economic growth.
TLT•
