Oil Surge Keeps Bond Yields Near Monthly Highs

Eurozone government bond yields and U.S. Treasury yields were largely unchanged on Monday, remaining close to multi-week highs as investors balanced the traditional safe-haven appeal of government debt against growing concerns that escalating tensions in the Middle East and rising oil prices could fuel inflation.

Germany’s benchmark 10-year Bund yield held at 3.05%, maintaining most of its recent gains, while the two-year Bund yield, which is more sensitive to monetary policy expectations, stood at 2.68%.

In the United States, the two-year Treasury yield remained steady at 4.22%, while the 10-year Treasury yield hovered around 4.57%. Both remained near their highest levels in more than a month, reflecting investor concerns that higher energy costs could keep inflation elevated and complicate central bank efforts to ease monetary policy.

Market attention has been focused on developments in the Middle East after Iran announced that the Strait of Hormuz — a critical passage for global oil shipments — would remain closed “until further notice.” The announcement triggered a sharp rise in oil prices, with Brent crude climbing more than 4%, reigniting fears of renewed inflationary pressures.

Typically, geopolitical uncertainty drives investors toward government bonds, pushing yields lower. However, the inflationary implications of rising energy prices have offset that effect, keeping yields elevated.

The cautious start to the week follows significant losses in bond markets last week. Eurozone government bonds recorded their steepest weekly selloff in over a month as deteriorating diplomatic efforts in the region fueled expectations of prolonged economic and energy disruptions.

Germany’s 10-year yield posted its largest weekly increase in five weeks, supported by growing speculation that the European Central Bank (ECB) may be forced to pause or slow its rate-cutting cycle if energy-driven inflation persists.

Investors are also awaiting comments from ECB Executive Board member Isabel Schnabel later today. As one of the ECB’s most hawkish policymakers, Schnabel’s remarks will be closely scrutinized for indications of how the central bank views inflation risks stemming from the Gulf crisis.

In the United States, Federal Reserve Governor Michelle Bowman is also scheduled to speak, with markets looking for further insight into the Fed’s outlook on interest rates and inflation.

Meanwhile, the U.S. Treasury Department will release June’s federal budget balance, offering additional perspective on the country’s fiscal position ahead of Federal Reserve Chair Kevin Warsh’s upcoming congressional testimony and the closely watched June Consumer Price Index (CPI) report.

Source: Investing