Eurozone sovereign yields increased on Monday as a temporary ceasefire between the United States and Iran rekindled concerns about energy market volatility and its potential to feed into inflation. Investors responded to the heightened geopolitical risk by increasing dollar exposure and selling some fixed-income positions in the single-currency bloc.
Bunds move higher - Germany's benchmark 10-year Bund yield edged up to 2.86%, recovering from the March lows recorded last week. The two-year German yield, which typically reacts more directly to shifts in monetary policy expectations, also climbed during the session to 2.53%.
Fixed-income markets felt immediate upward pressure following military activity over the weekend in the Strait of Hormuz. Although a temporary halt to retaliatory strikes between Washington and Tehran was agreed, to be followed by a technical meeting in Doha on Tuesday, traders flagged the persistent vulnerability of the key maritime corridor.
The perceived fragility of shipping lanes pushed crude oil prices higher, a move that revived concerns about sticky inflation that had briefly been eclipsed by equity market volatility last week. Higher oil costs are being watched closely by bond markets for their potential to keep price pressures elevated and influence central bank policy decisions.
In addition to geopolitical developments, sovereign debt markets are bracing for a cluster of important economic and policy-related events later in the week. Yield moves were relatively restrained ahead of the U.S. non-farm payrolls release, an indicator market participants view as pivotal for validating or challenging current Fed policy pricing. Traders are watching whether incoming payrolls data will support expectations for two 25-basis-point rate hikes by the Federal Reserve before December.
Closer to home, euro-area releases on consumer confidence and business conditions for June are due later in the trading session and could influence European yields if the data surprise. Market participants are also focused on remarks from European Central Bank President Christine Lagarde, who will open the ECB's Sintra Forum. The event features panels that include Bank of England Governor Andrew Bailey and Federal Reserve chair Kevin Warsh and is expected to be closely parsed by bond markets across regions.
Investors are searching for signs that could push back against prevailing money market expectations. Current pricing implies at least one additional 25-basis-point ECB rate increase this year, following the bank's recent lift of the deposit rate to 2.25%.
What to watch this week
- U.S. non-farm payrolls - seen as key to Fed rate-path expectations.
- Euro-area consumer confidence and business conditions data for June.
- Speeches and panels at the ECB's Sintra Forum, including remarks by the ECB president.