German yields and ECB rate expectations move higher
Germany's 10-year bond yield, the benchmark for the euro zone, was last up 2.4 basis points to 3.0585%. 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.
On Monday, Brent crude futures LCOc1 rose 3.3% to $78.52 per barrel. That put prices above pre-war levels, but far below April's highs.
The German 2-year bond yield, which is widely regarded as more sensitive to interest rate expectations, was up 4.3 bps to 2.6921%. 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.
Euro zone yields rise as oil and inflation worries build
Euro zone bond yields rose as oil prices climbed and global inflation worries grew after U.S. and Iranian forces exchanged heavy missile and drone attacks and Tehran said it had again closed the Strait of Hormuz.
The attacks cast further doubt on the future of an interim U.S.-Iranian agreement signed last month that aimed to reopen the strait and end the war in the Middle East after a further 60 days of negotiations.
Volatility likely to continue with data and supply ahead
Apart from developments in the Middle East, "various impulses in the coming days should keep markets on their toes, suggesting more volatility," said Rainer Guntermann, rates strategist at Commerzbank.
Guntermann said there was "a lively domestic supply schedule with large backflows," and referred to key U.S. data points including consumer inflation data for June.
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