Eurozone bond yields fall 5bps after U.S.-Iran peace deal

Eurozone government bond yields fell about 5 basis points Monday after the U.S. and Iran agreed to an interim peace deal, easing inflation concerns that had gripped global markets for weeks.

"The ECB is likely done with its rate hiking cycle," said Mohit Kumar, an economist at Jefferies. "If oil falls below $80 in the near term, it would remove any reason for the Federal Reserve to raise interest rates."

France's 10-year yield dropped 4.8 basis points to 3.697%, while its two-year yield fell 5.2 basis points to 2.741%. Italy's 10-year yield declined 5.3 basis points to 3.668%, Spain's lost 4.4 basis points to 3.376% and Greece's slid 5.3 basis points to 3.628%. Germany's 10-year Bund yield, the eurozone benchmark, fell 4 basis points to 2.960%.

The broad decline in borrowing costs across core and peripheral eurozone nations signals markets are pricing a lower path for interest rates as oil prices retreat. Brent crude dropped 4.3% to $83.53 a barrel after President Trump and Pakistani negotiators said the Strait of Hormuz would reopen Friday. The U.S. 10-year Treasury yield slipped nearly 5 basis points to 4.439%, while the dollar index fell 0.3% to 99.496.

The moves mark a sharp reversal from last week's risk-off trading, when the threat of a prolonged closure of the Strait of Hormuz pushed oil prices above $90 and stoked inflation fears across developed economies. The interim deal between Washington and Tehran removes the most acute geopolitical risk that had been hanging over global markets since hostilities escalated in early June.

For the European Central Bank, the easing of energy price pressures reduces the need for further tightening. The ECB had been under pressure to respond to the inflation pass-through from higher oil costs, which threatened to derail the region's fragile economic recovery. With the peace deal, markets are now pricing a lower terminal rate for the eurozone.

The yield declines were broad-based across maturities. France's 30-year bond yield fell 3.1 basis points to 4.502%, reflecting demand for longer-dated sovereign debt as the inflation outlook improved. The rally in government bonds also benefited peripheral eurozone nations, with the spread between Italian and German 10-year yields narrowing to about 71 basis points.

This article is for informational purposes only and does not constitute investment advice.