Euro zone yields rise, gap between German and US borrowing costs smallest in a month

In contrast, the 10-year U.S. Treasury yield was last 4.56%, up 2 bps on the day, but flat on the week, and up just 14 bps on the month.

The U.S. is less exposed to energy from the Gulf than Europe, and traders have pared back bets on imminent Federal Reserve rate hikes after this week's cooler-than-expected prints for both consumer and producer inflation.

The gap between German and U.S. 10-year borrowing costs sat near its narrowest in a month on Thursday as the escalation of fighting in the Gulf sent euro zone yields higher, while cooler inflation data has kept U.S. Treasury yields in check.

Germany's 10-year bond yield, the benchmark for the euro zone, was last 1 basis point higher at 3.13%, its highest since May 20. It has risen 9 bps so far this week, and 26 bps in July so far as traders fear the renewed climb in oil and gas prices after fighting resumed between Iran and the U.S. in the Gulf, could push inflation higher and force the European Central Bank to raise rates more aggressively, and also weigh on longer-term economic growth.

Markets currently see around a 90% chance of an ECB rate increase by its September meeting — that would be its second this year after June's hike — and a good chance of a third move by year end.

The gap between German and U.S. 10-year borrowing costs was last 144 bps, roughly its lowest since early June. It was as wide as 157 bps in late June, when European government bonds were rallying on signs oil and gas would resume flowing through the Strait of Hormuz, while traders thought the Fed may need to hike rates soon.