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

Italy’s 10-year government bond yields fell 6 bps to 3.94%. The spread between Italian government bonds and Bunds was at 78 bps. It stood at 63 bps in February before the attack on Iran and hit 103.62 in late March, the highest level since June 2025. Germany’s two-year yields, more sensitive to expectations for policy rates, fell 4.5 basis points (bps) to 2.77%, after reaching a two-year high of 2.8938% last week. Money markets slightly scaled back bets on the European Central Bank deposit rate rising to 2.67% in December and 2.72% in February 2027 from the current 2.25%. Last week, they fully priced a depo rate at 2.75%. The ECB still considers the current inflation shock to be medium-sized, which requires some policy action but not aggressive moves, and it will get price growth back to 2% in the next year or so, ECB chief economist Philip Lane said. The central bank kept interest rates unchanged as expected on Thursday but held the door open to another increase in September. Government bond yields across the euro zone fell on Monday as easing oil prices helped soothe short-term inflation fears following U.S. President Donald Trump's decision to suspend attacks on Iran. Oil prices tumbled 9.5% after the U.S. and Iran paused strikes over the weekend, raising hopes of a diplomatic solution that would de-escalate the conflict and allow shipping to resume in the Strait of Hormuz. Germany’s 10-year government bond yield, the euro area’s benchmark, was down 4 bps at 3.13%. It reached 3.2118% last week, its highest level since May 2011. German business morale grew more than expected 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 FOMC. Investors will closely watch the Federal Reserve policy meeting later this week 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's next meeting, but markets kept betting on rates on hold. Traders are pricing in a 33.7% chance of a rate hike, according to CME Group's FedWatch Tool, up sharply from 12% roughly two weeks ago. Markets do not expect any action on rates from either the Bank of Japan or the Bank of England on Thursday.

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

Italian bond yields and spreads

German yields and ECB rate expectations

Euro zone bond yields fall as oil prices ease

Longer-dated yields and upcoming central bank meetings

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