Euro zone yields fall after Iran raises prospect of Hormuz reopening

Germany's two-year bond yield DE2YT=RR, which is sensitive to interest-rate expectations, fell 3 bps to 3.174%, following a 6-bp drop on Monday.

Rabobank senior rates strategist Lyn Graham-Taylor said lower oil prices following the Iranian comments were weighing on bond yields.

Brent crude futures LCOc1 fell 2% to $98 a barrel, their lowest in two weeks. Prices were also pressured by a Reuters report that Saudi Arabia had restarted its East-West Pipeline at a low rate after drone attacks forced its closure earlier this month.

Tensions in the Middle East remain elevated, however, with Houthi fighters pushing to seize more Saudi-held territory in Yemen. The rapid advance by the Iran-backed group has widened the regional conflict in recent weeks.

French government bonds underperformed their peers as investors continued to focus on France's budget debate and the run-up to the 2027 presidential election.

The spread of French over German 10-year yields rose 2 bps to 104 bps DE10FR10=RR. The gap, a gauge of the risk premium attached to French debt, hit its highest since 2012 on Friday at 105 bps but fell on Monday as yields dropped.