German 2-year yields drop from 19-month high, oil prices in focus

By Stefano Rebaudo

March 10 (Reuters) - Germany’s policy-sensitive 2-year bond yields slipped on Tuesday after touching a 19-month high the previous day, with investors pausing for breath after U.S. President Donald Trump said the war with Iran could end “very soon.”

Euro zone government bonds have tracked moves in oil prices since early last week as the Middle East conflict fuelled expectations of rising inflation and potential tightening by central banks on both sides of the Atlantic. Brent futures fell on Tuesday after hitting a more than three-year high in the prior session.

Iran's Revolutionary Guards said on Tuesday they would not allow "one litre of oil" to be shipped from the Middle East if U.S. and Israeli attacks continue, prompting a warning from Trump.

Germany’s 2-year yields DE2YT=RR, more sensitive to expectations for policy rates, were down 3 bps at 2.29%. They hit 2.476% on Monday, their highest level since August 2024.

Money markets priced in a 60% chance of a European Central Bank rate hike by July EURESTECBM4X5=ICAP and an 85% chance of the same hike by year-end. EURESTECBM7X8=ICAP

Economists remain wary of an ECB tightening move, arguing that the bank has previously looked through oil-driven inflation spikes when higher energy costs also weakened the economy.

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, fell 2 basis points (bps) to 2.84%. It reached 2.931%, its highest level since mid-March last year.

Italy’s 10-year government bond yields IT10YT=RR dropped 7.5 bps to 3.55%. The gap versus Bunds tightened to 67.50 bps on Friday. It was at 63 bps before the conflict in the Middle East started.

Preference for Bunds widened yield spreads with government bonds of the most indebted euro area countries, such as Italy and France, although German bonds lost some of their shine as safe-haven assets.