Markets price in two ECB rate hikes by early 2027 as Brent tops $90
TLT•German yields rise as oil prices climb
German two-year government bond yields climbed to a two-year high on Monday as rising oil prices driven by the Iran conflict reinforced expectations that the European Central Bank will deliver two additional rate hikes by early 2027.
Brent oil prices climbed 3% to more than $90 per barrel, as escalating U.S.-Iran hostilities restricted oil shipments through the Strait of Hormuz.
Money markets push back ECB rate-cut expectations
Germany’s 2-year yields, more sensitive to expectations for policy rates, rose 2 basis points (bps) to 2.79%, after reaching 2.8174%, their highest level since July 2024.
Money markets indicated the ECB deposit rate at 2.69% in December and 2.77% in February 2027, from the current 2.25%. They also fully priced a rate hike in September.
Analysts flagged that the tight correlation between oil prices and the euro front-end, a dynamic that dominated market moves throughout March, April and May, has resurfaced in recent trading.
Longer-dated bunds and Italian spreads move higher
Germany’s 10-year government bond yield, the euro area’s benchmark, was up 2 bps at 3.15%. It reached 3.20% in mid-May, its highest level since May 2011.
Market participants continued to expect the ECB to leave interest rates unchanged at its policy meeting later this week.
“Despite the resurfacing tensions in the Middle East and rising oil prices, these remain somewhat below the June baseline assumptions and signs of second-round effects remain limited,” said Giada Giani, an economist at Citi.
Italy’s 10-year government bond yields rose 3.5 bps to 3.83%.
The yield gap between Italian government bonds and bunds was at 82 bps, its highest level since early May. It was at 63 bps in February before the attack on Iran and hit 103.62 in late March, the widest since June 2025.
