UK government bonds rose alongside US Treasuries after US President Donald Trump indicated that negotiations with Iran to extend a ceasefire were progressing, despite recent clashes near the Strait of Hormuz.
The yield on the UK two-year gilt fell by 3 basis points to 4.30%, marking its lowest level since April 22. Swap markets now imply that the Bank of England will raise interest rates by 44 basis points this year, down from the 49 basis points forecast last Friday.
In contrast, eurozone bonds underperformed. The yield on Germany's two-year bond rose by 6 basis points to 2.59%. European Central Bank (ECB) officials reinforced expectations for further tightening. ECB Executive Board member Isabel Schnabel stated that the ECB should raise interest rates next month even if the Middle East conflict is resolved quickly. Similarly, ECB Executive Board member Olaf Sleijpen emphasized that the ECB will take all necessary measures to bring consumer price growth back to target.
Swap contracts now price in 62 basis points of ECB rate hikes for the year, an increase from the 54 basis points priced at the market open.
Market Snapshot: - The yield on the German 10-year bund increased by 4 basis points to 2.98%. - The German bund futures contract fell by 33 ticks to 126%. - The yield on Italy's 10-year bond rose by 6 basis points to 3.71%. - The Italy-Germany 10-year bond yield spread widened by 2 basis points to 73 basis points. - The yield on France's 10-year bond increased by 4 basis points to 3.60%. - The yield on the UK 10-year gilt decreased by 1 basis point to 4.88%.
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