German 2-year bond yield rises as Middle East conflict sparks inflation concerns
By Sophie Kiderlin and Niket Nishant
LONDON, March 2 (Reuters) - Short-dated euro zone government bond yields rose above multi-month lows on Monday, as concern mounted over the impact that a prolonged conflict in the Middle East could have on global growth and inflation.
The yield on the German two-year bond DE2YT=RR, which is sensitive to interest rate expectations, was last around 3 basis points higher at 2.0443%, having started the day lower. It had been trading at multi-month lows on Friday.
The yield on the benchmark German 10-year bond DE10YT=RR also initially eased as the trading day began as risk-off sentiment dominated markets, before edging into positive territory. It was last up around 2 basis points at 2.6762%. 10-year Bund yields had ended February with their steepest monthly drop since last April after declining for three consecutive weeks.
The curve between the 2-year and 10-year German bond yields showed a bear flattening scenario, where shorter-dated yields rise by more than longer-dated ones. The gap between them was last at around 64 basis points.
It appeared increasingly likely that the Middle East conflict could become drawn out as military strikes by the United States and Israel on Iran showed no sign of easing up, and Iran has responded with missile barrages across the region.
U.S. President Donald Trump suggested in an interview with the Daily Mail the conflict could last for four weeks, while posting that attacks would continue until U.S. objectives were met.
"We're not in a panic mode yet because investors had already started thinking of geopolitics as a persistent uncertainty," said Michiel Tukker, senior European rates strategist at ING.
RISING INFLATION WORRIES?
While crises and conflict often prompt investors to pour into safe-haven assets, such as government bonds, concerns also grew about inflation being pushed higher by elevated energy prices.
Oil prices surged on supply disruption concerns, with Brent crude LCOc1 last up around 7.2% to $78.03 a barrel. European natural gas futures TFMBMc1 rose 35% on the day.
A key market gauge of euro area long-term inflation expectations < EUIL5YF5Y=R> jumped as high as 2.1217% from 2.0806% on Friday. It was last at 2.1029%.
Inflation reigniting could eventually put pressure on the European Central Bank to adapt its interest rate policy. Money markets were last pricing in around a 21% chance of a rate cut by the end of the year, slightly below expectations earlier in the day.
"The ECB's perspective really is about the more medium-term rather than the sort of knee-jerk," Andrzej Szczepaniak, senior European economist at Nomura, said, noting that the ECB was largely looking at a two- or three-year horizon, while the impact of current oil price moves would unfold before then.
Investors this week will be looking out for February's euro zone inflation figures, which are due Tuesday. Data out of Germany last week showed that inflation in the euro zone's largest economy unexpectedly fell to 2% in February, pushed lower by falling energy costs.
In January, euro zone inflation fell to 1.7% after hovering around the 2% target for much of 2025.
