Euro zone bonds rally as Trump halts some Iran strikes

By Sophie Kiderlin and Stefano Rebaudo

March 23 (Reuters) - Euro zone government bonds rallied in a bumpy session on Monday after President Donald Trump said he would order the U.S. military to postpone any strikes against Iranian power plants and energy infrastructure for five days.

Trump said he has had "good and productive conversations" with Iran.

Meanwhile, Iran's Tasnim news agency, citing an Iranian official, said that the Strait of Hormuz would not return to pre-war conditions and energy markets would remain unsettled, adding that no negotiations with the U.S. were underway.

Bonds had been selling off for the fourth consecutive session earlier in the day, but then sharply reversed course following Trump's comments. Over the weekend, Trump had threatened to destroy Iranian power plants if Tehran failed to "fully open" the Strait of Hormuz to all shipping within 48 hours.

"What's done is still not undone, so the impact has yet to be seen. But obviously markets are breathing a sigh of relief on this news," Chris Beauchamp, chief market analyst at IG Markets, said.

Germany's 10-year government bond yield DE10YT=RR, the euro area's benchmark, was last down around 5 bps at 2.9873%, after hitting 3.077% early in the session, its highest since June 2011.

The spread between German and Italian 10-year bond yields on Monday had widened as far as 103.62 bps for the first time since June 2025, but was last back down to around 86 bps.

"I think we are literally trading off of headlines now," Andrzej Szczepaniak, senior European economist at Nomura, said, noting that most economic data being published was already stale.

"From a market perspective it's really just monitoring the news headlines that we're getting over the course of today and this week, seeing how those impact oil and gas headlines and obviously from that perspective, yields."

SHIFTING RATE EXPECTATIONS

Global bonds have been under pressure as the conflict in the Middle East has stoked inflation fears, with central banks around the world last week raising the alarm on the risk of higher prices. The accelerating inflation concerns have also upended central bank policy expectations.

Those shifted again on Monday after Trump's remarks, with investors scaling back their bets on future European Central Bank rate hikes.

Money market pricing last indicated an around 61% probability of an ECB rate hike at its next meeting in April, down from close to 90% earlier in the day. Markets were last pricing in at least two rate increases from the ECB this year, compared with at least three previously.

This is, however, still a sharp contrast from the end of February, when the ECB was broadly expected to keep rates steady this year.

ECB policymaker Peter Kazimir on Monday said that the central bank would not hesitate to tighten policy if the coming energy-driven inflation surge looks like it could become entrenched.

Shorter-dated bond yields, which are more sensitive to policy expectations, also broadly turned lower, with German 2-year yields last down close to 10 bps to 2.5716%. They had risen as high as 2.764% earlier in the day.

Italian 2-year yields IT2YT=RR were 7.8 bps lower to 2.8813%, having climbed to 3.151% previously.