Major eurozone government bond yields rose broadly on Monday, driven by renewed geopolitical tensions in the Middle East and a surge in international oil prices. Market analysis suggests that inflation concerns stemming from rising energy costs are intensifying investor expectations that the European Central Bank (ECB) may be forced to adopt more aggressive monetary tightening policies.
Monday's market trading showed that the yield on Germany's interest-rate-sensitive 2-year government bond rose by nearly 5 basis points to 2.63%. The yield on the benchmark German 10-year government bond, a key indicator for the eurozone, increased by 2 basis points to 3.02%. Concurrently, the yield on Italy's 10-year government bond stood at 3.77%, maintaining a spread of 71 basis points over German bonds.
Geopolitical volatility is the direct catalyst for the downturn in the bond market. Following the U.S. announcement rejecting Iran's latest response regarding a peace agreement, turbulence in the international energy market intensified. As of that day, the price of Brent crude oil for June delivery rose by 2% to $103.5 per barrel. With restricted transportation through key waterways such as the Strait of Hormuz, oil prices are expected to remain elevated, further heightening market vigilance against imported inflation.
Currently, the money market has largely priced in expectations for an ECB rate hike at its June policy meeting. The market widely anticipates that the ECB will implement two 25-basis-point rate hikes across its three consecutive meetings through September, with the probability of a third hike before year-end now rising to 50%.
In an interview published on Monday, Martin Kocher, a member of the ECB's Governing Council and Governor of the Austrian National Bank, explicitly stated that if geopolitical conditions do not improve significantly, interest rate action in the near term will be unavoidable. He emphasized that if prolonged conflict leads to persistently high energy prices, the risk of triggering a "second-round effect" on inflation would increase significantly.
Regarding this, analysts at Goldman Sachs noted in a research report that the trajectory of eurozone interest rates in the coming weeks will be highly dependent on geopolitical developments. Although wage growth in Europe remains relatively stable and high energy costs are exerting some dampening effect on economic growth, the bond market will continue to face sustained volatility pressure against the backdrop of the ECB's hawkish signals.
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