Geopolitical tensions temporarily ease and eurozone bond yields retrace, but expectations for a September rate hike remain elevated.
- Eurozone government bond yields edged slightly lower on Thursday. Oil prices stabilized after a sharp rise on Wednesday, leading to a cooling of safe-haven buying that had surged amid heightened geopolitical risks in the previous trading session. However, most maturities still remain near seven-week highs.
- The German 10-year yield fell by one basis point to 3.074%. Previously, it had jumped 10 basis points on Wednesday and reached a new high since mid-May during Thursday's early session. The market is still digesting news about the precarious status of the US-Iran ceasefire agreement. Trump's claim that the agreement is "already over" once pushed Brent crude above $80, though prices later slightly retreated.
- The German two-year yield, which is more sensitive to European Central Bank rate expectations, declined by two basis points on Thursday. Pricing in the currency market for further tightening this year trimmed from Wednesday's intraday high of 40 basis points to 37 basis points, but this level remains significantly higher than 21 basis points at the start of the week, indicating that even after geopolitical risk premiums fade, the market continues to hold a hawkish policy outlook.
- The Italy-Germany and France-Germany yield spreads both widened to multi-month highs on Wednesday, reflecting more decisive selling of bonds from high-debt countries. Jefferies analysts pointed out that the coming days will be critical for determining whether the situation escalates or is simply another show of force. Geopolitical narratives will continue to dominate directional trading in the short term.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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