Euro zone bond yields pull back as oil dips; rates, inflation outlook in focus

The yield on Germany's two-year bond, which is more sensitive to interest rate expectations, was last around 4.8 bps lower at 2.8421%, having touched its highest point since July 2024 in the previous session. Meanwhile, a survey on Friday showed that euro zone business activity returned to growth in July for the first time in four months, driven by a rebound in new orders, while the rate of overall input cost inflation eased to its lowest since February. "Were it not for the resurgence of the conflict in the Middle East, the picture would have looked encouraging," ING economist Bert Colijn said. "But as European Central Bank President Christine Lagarde said yesterday at the press conference, we are back to where we were in early June, with downside economic risks and upside inflationary risks resurfacing." Euro zone bond yields fell on Friday, having hit multi-year highs a day earlier, as oil prices eased back below the $100 mark and markets weighed the inflation and interest rate outlook. The yield on Germany's 10-year bond, the benchmark for the euro zone, was last down 2.7 basis points (bps) to 3.1845%. It hit a 15-year high in the previous session. Euro zone bonds have been under pressure — especially given the European economy's vulnerability to imported energy — throughout the week, with oil prices rising above $100 per barrel for the first time since May. On Friday, Brent crude futures were last almost 3.2% lower at $97.53 per barrel, though they were still set for a near 11% weekly rise. "Oil dynamics are set to remain in the driving seat," for bond markets, Commerzbank strategists said in a note. The European Central Bank left interest rates unchanged on Thursday, as expected, but kept the option for a September increase on the table. Markets were last pricing in a strong chance of a September rate hike from the ECB, with the possibility of another increase later in the year. Felix Schmidt, senior economist at Berenberg, said the ECB would likely react in September if energy prices remain around current levels or spike further. But, he noted that the situation in the Middle East could change quickly. "If you see a de-escalation, another ceasefire - we saw it after the first ceasefire, oil prices can come back very quickly and inflation can come down very quickly, so there's also still the chance that there will be no hike in September," Schmidt said. Several ECB policymakers on Friday noted that inflation risks are high and that the central bank may need to raise rates once more, but they stopped short of calling for an outright hike at the bank's September meeting. Energy prices have been pushed higher by fresh hostilities in the Middle East, as well as concerns about a second shipping chokepoint emerging. Spiking energy costs prompted fresh inflation worries and led traders to bet on additional policy tightening from the world's central banks. Elsewhere, the U.S. on Friday imposed new tariffs on goods from 60 trading partners, which further added to inflation jitters.

Euro zone bond yields pull back as oil dips; rates, inflation outlook in focus

Business activity improves, but risks remain

Euro zone bond yields ease as oil prices dip

ECB rate outlook remains open ahead of September

Energy prices and tariffs keep inflation worries elevated

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