Middle East Conflict Sparks Euro Zone Bond Yield Surge

The Euro zone saw a significant drop in government bonds on Thursday, leading to a rise in yields as investors grew increasingly worried about an inflationary shock from the Middle East conflict. Oil prices surged, nearing peak levels as the U.S.-Iran war disrupted supplies, resulting in the steepest weekly bond yield increase in a year.

Germany's 10-year Bund yields increased by 5 basis points to 2.79%, marking a 14 bps rise for the week, the largest since March 2025. Short-dated yields, closely tied to inflation expectations, also rose sharply. Chris Turner from ING highlighted that this phenomenon is not confined to the Euro zone but reflects a global trend.

Energy price hikes have reshaped expectations for the European Central Bank's rate decisions, with traders ruling out interest rate cuts this year. The ECB is set to meet in March to determine monetary policy, but analysts foresee no rate changes. Concerns over energy dependencies and elevated inflation amid prolonged conflict are mounting across Europe.