Bund yields at 2-1/2-year high on inflation fears; central banks in focus

By Stefano Rebaudo

March 16 (Reuters) - Euro zone benchmark Bund yields hovered near their highest in almost 2-1/2 years on Monday, as the Middle East conflict stoked inflation fears and reinforced expectations of monetary tightening ahead of a week packed with central bank meetings.

Oil prices rose about 1% on Monday and are up more than 40% this month as Tehran halts shipments through the Strait of Hormuz in retaliation for U.S.–Israeli air strikes.

The Federal Reserve will announce its policy decision on Wednesday, with the European Central Bank, the Bank of England and the Bank of Japan following a day later.

Central banks are expected to hold interest rates this month, but investors will focus on any clues as to how policymakers might respond to the economic impact of the conflict in the Middle East.

Yields on Germany’s 10-year government bond DE10YT=RR, the euro zone benchmark, rose 0.5 basis point to 2.98%. On Friday they touched 2.994%, the highest level since October 2023.

Money markets are fully pricing in a European Central Bank rate hike by July EURESTECBM4X5=ICAP, along with an 85% chance of a second increase by year-end. EURESTECBM7X8=ICAP

Germany’s 2-year yield DE2YT=RR, more sensitive to expectations for policy rates, was flat at 2.43%, having hit 2.476% last week, the highest since August 2024.

Italy’s 10-year government bond yield IT10YT=RR bp to 3.79%.

Although German bonds have lost some of their safe-haven appeal, spreads widened when war developments hurt risk appetite.

The 10-year yield spread between Italian government bonds and Bunds was at 80 bps, widening from 63 bps before the U.S. and Israel launched the war on Iran. The spread had narrowed to 53.50 in mid-January, its smallest since August 2008.

French 10-year bonds were yielding 68.50 bps more than Bunds DE10FR10=RR, compared with 58 bps before the conflict began.