Brent crude oil prices were down almost 2% on Monday to $92.75 after rising more than 6.5% last week, with markets now awaiting U.S. Treasury Secretary Scott Bessent's sanctions plan that aims to inflict economic pain on Iran and could further disrupt energy supplies from the Middle East.
Higher energy prices have prompted markets to price in increasingly tighter policy from the European Central Bank, with tighter supplies of refined fuels and dwindling gas inventories threatening to send inflation even higher.
Markets are almost fully pricing in a quarter-point rate hike to 2.5% from the ECB next month. Futures also imply a roughly 25% chance that the ECB's deposit rate reaches 3% by March 2027 and about a 60% chance by September.
Germany's 2-year yield, which is sensitive to changes in ECB policy expectations, was down 1.5 bps to 2.823%.
Long-end yields stay near multi-decade highs
Investors were also closely watching moves at the longer end of the yield curve with yields touching multi-decade highs across the globe last week, in part due to worries about fiscal sustainability.
Germany's 30-year yield was down 2 bps on Monday to 3.743%, just below its highest level in more than 15 years of 3.787% reached last week.
Other countries in the euro zone faced similar moves with France's 30-year OAT yield touching its highest since September 2008 last week. It was last down 2 bps on the day to 4.894%.
"In Europe, long-end OATs are particularly exposed given looming budgetary and election uncertainty," Siemssen said.
Euro zone yields edge lower as oil prices retreat
Euro zone government bond yields were down slightly on Monday as lower oil prices tempered inflation concerns, with investors awaiting details of threatened U.S. sanctions on Iran.
Germany's 10-year yield, the euro zone benchmark, was down 2 basis points at 3.236%. It rose to as high as 3.275% last week, its highest level in more than 15 years, as concerns about the inflation and fiscal outlook gripped markets.
Bond yields move inversely to prices.
"Global bond markets remain vulnerable with yields across the curves testing multi-year highs," said Commerzbank rates strategist Hauke Siemssen in a note.
"While this morning's consolidation is encouraging, a lasting turnaround seems unlikely for now as there is no easy fix to the underlying drivers."
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