Euro zone yields drop as US, Iran pause strikes; Fed also in focus

Germany's 10-year government bond yield, the euro zone's benchmark, was down 5 bps at 3.124%. It reached 3.2118% last week, its highest since May 2011.

German business morale grew more than forecast in July on a significant improvement in expectations, a survey showed on Monday.

“ A packed agenda with high-profile data cluster on Thursday and several central bank decisions could add to the relief and also decisively shape the direction for yields, curves and spreads for the rest of the summer,” said Commerzbank strategist Rainer Guntermann, mentioning upcoming U.S. inflation figures due after the Federal Reserve's policy meeting.

Investors will closely watch the Fed meeting for signals on how Chair Kevin Warsh views energy-driven risks.

A growing chorus of policymakers recently argued rates may need to rise, setting up a charged debate at the Fed, though markets are still betting rates will stay on hold.