U.S. and U.K. 10-year government-bond yields rose to two-month highs while the equivalent German yield hit its highest level since 2011 in European trading hours as escalating military clashes in the Middle East lifted Brent crude oil prices close to $100 a barrel.
High oil prices raise concerns about the risk of rising inflation and the possibility that central banks might have to raise interest rates in response.
"Developments in the energy market demonstrate how quickly geopolitical risks can translate into inflation expectations and interest rate movements," John Petersen, portfolio manager at Eyb & Wallwitz, said in a note.
Germany's 10-year Bund yield rose to 3.205%, LSEG data showed. The 10-year U.S. Treasury yield rose to 4.679% while the 10-year U.K. gilt yield jumped to 5.089%, according to Tradeweb. Brent crude oil last traded at $97.60 a barrel, up 3.75%.
Oil prices have been rising again since early July when U.S. President Trump declared the U.S.-Iran Memorandum of Understanding for a ceasefire to be over. Military hostilities in the Middle East have escalated and investors have become particularly concerned about attacks expanding to the Red Sea.
American forces struck Iran for a 12th consecutive day, while Iran's Houthi allies said they hit two Saudi oil tankers in the Red Sea, raising concerns about a second chokepoint for oil at the Bab el-Mandeb Strait. Meanwhile, the U.S. is surging forces, medics and weaponry to the Middle East to allow for increased military options.
The result was a fresh risk premium in crude and a renewed market focus on inflation, Saxo analysts said in a note.
The latest jump in oil prices will be a concern for European Central Bank policymakers, who are due to announce a decision later on Thursday.
Investors expect eurozone interest rates will be left on hold, keeping the deposit rate at 2.25%, after rates were hiked at the last meeting, but there is an increasing prospect that policymakers could flag a further increase in September.
"Markets will be very attentive to clues for September, which features updated forecasts," analysts at KBC Bank said in a note.
Attention is also on the Federal Reserve and the Bank of England, which will hold policy meetings on Wednesday and Thursday next week, respectively. They, too, are expected to keep interest rates on hold but to flag a risk of hikes further down the line due to rising oil prices.
"We continue to expect the Fed to raise rates by 25 basis points in both September and December, followed by an extended hold until early 2028," Deutsche Bank analysts said in a note. The Fed funds target rate range is currently 3.50%-3.75%.
The BOE is also likely to keep the bank rate on hold at 3.75% next week, "while maintaining a clear tightening bias," said Martin Wolburg, senior economist at Generali Investments.
Write to Emese Bartha at emese.bartha@wsj.com
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July 23, 2026 05:34 ET (09:34 GMT)
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