Bund yields trade near 15-year high as Middle East conflict fears linger
By Stefano Rebaudo
March 24 (Reuters) - Euro zone benchmark Bund yields edged down from their highest levels in nearly 15 years on Tuesday, with investors growing more cautious over the Middle East conflict following mixed signals about potential negotiations between the U.S. and Iran.
Oil prices have jumped more than 40% since early March, fuelling inflation concerns and lifting expectations of further European Central Bank rate hikes. Brent futures were still up on supply fears on Tuesday.
Iran sent waves of missiles into Israel and dismissed Trump's talks of negotiations as 'fake news', while a U.S. official said Washington will continue its strikes on Iran.
Investors continued to be sensitive to headlines about potential peace talks. Pakistan's prime minister said on Tuesday he was willing to host talks between the U.S. and Iran.
Germany's 10-year government bond yield DE10YT=RR, the euro area's benchmark, dropped one basis point (bp) to 3.01%. It reached 3.077% on Monday, its highest level since June 2011.
"We are far from an all-clear situation but Trump’s talks highlight two important points: the diplomatic channel is open and alive between the U.S. and Iran and the U.S. really wants to get out of the current war situation," said Mohit Kumar, an economist at Jefferies.
"For investors who have not yet been involved in the rates market, we would favour fading the recent selloff," he added.
Three senior Israeli officials speaking on condition of anonymity, said that they viewed it as unlikely that Iran would agree to U.S. demands in any new round of negotiations.
Money markets fully priced in two European Central Bank rate hikes by July EURESTECBM3X4=ICAP, along with a depo rate at just under 2.75% by year-end. EURESTECBM6X7=ICAP, implying a high chance of a third hike. The deposit facility rate is currently at 2%.
Euro zone private sector growth nearly stalled this month, a key survey showed on Tuesday.
"Higher input costs and sharply lengthening delivery times make the current situation look pretty similar to the start of the inflation shock in 2021-22," said Giada Giani, an economist at Citi.
"These PMIs do point to higher inflation ahead and probably not just in energy," she added.
Germany's 2-year yields DE2YT=RR, more sensitive to expectations for policy rates, was up 1 bp at 2.627%. They hit 2.764% the day before, their highest level since July 2024.
Italy's 10-year government bond yields IT10YT=RR fell 1 bp to 3.916%, after reaching on Monday 4.119%, their highest since July 2024.
The yield gap of Italian government bonds versus Bunds was at 90 bps. It was at 63 bps before the attacks against Iran and hit 53.50 in mid-January, its lowest level since August 2008.
The French spread was at 72 bps DE10FR10=RR from 58 bps before the conflict.
