Eurozone government bonds fell on Thursday, with yields rebounding, partially reversing the rapid gains from the previous trading day when a two-week ceasefire was announced by the US and Iran. The market soon realized that the ceasefire arrangement wasn't enough to immediately eliminate energy and inflation risks: Tehran still views Israel's military actions in Lebanon as an obstacle, while US President Trump warned that if Iran fails to implement a more lasting peace arrangement, the conflict could escalate sharply again. Meanwhile, the resumption of passage through the Strait of Hormuz remains slow, refocusing traders' attention back on oil prices and central bank pricing.
Bonds Reconnect with Oil Prices
This is also why the rebound in the European bond market after the ceasefire news did not last long. Reuters previously noted that the underlying logic of this global bond market adjustment has always been the stagflation risk brought by the energy shock: as long as crude oil and natural gas prices remain above pre-war levels, the bond market will find it difficult to return to pre-conflict valuation ranges. On April 9, Brent crude closed at $95.92 per barrel, and WTI at $97.89 per barrel, although these had retreated from pre-truce highs, they still linger at levels sufficient to disturb inflation expectations. For the eurozone, which is highly dependent on energy imports, this means that bond yields will continue to react sensitively to any news about Hormuz, the Lebanon front, and ceasefire implementation details.
Front-End Rates Reflect Policy Anxiety Most
Compared to the long end, Eurozone front-end rates are more sensitive to this repricing. The yield on German 10-year bonds recently returned to near 3%, while Italian 10-year bonds yield about 3.8%; the yield on Germany's 2-year bonds is about 2.55%, indicating that the short end is still absorbing expectations of higher policy rates. The market had previously reduced its bets on ECB rate hikes due to the truce, but broader pricing still points to about two hikes this year, retaining the possibility of further tightening. In other words, the ceasefire headline changes the trading pace, not the fundamental direction of the rate path.
ECB Does Not Rule Out Further Tightening
This pricing is not unfounded. Currently, the ECB's deposit rate is 2.00%, and the main refinancing rate is 2.15%. Recent comments from several officials clarified that if the energy shock translates into more persistent price pressures, the next policy move is likely to be a rate hike rather than a cut. In March, Lagarde stated that if the Middle East war pushes eurozone inflation higher and it remains elevated, the ECB may need to act; in early April, Banque de France Governor Villeroy also said that the next rate adjustment is "likely to be upward," although the timing is still to be determined. For the bond market, this means any oil price rebound could quickly translate into higher front-end yields.
Slower Growth Makes Bond Trading More Challenging
More challenging is that Europe is not currently facing a single inflation shock. The eurozone's composite PMI in March fell to 50.7, a nine-month low, with demand and new export orders weakening; March inflation rose to 2.5%, again above the ECB's 2% target. This means bond investors are forced to trade two opposing factors simultaneously: economic slowing should benefit the bond market, but high oil prices and imported inflation limit the downside space for yields. This is also why the market quickly turned cautious again after a strong rise on Wednesday.
Italian Bonds Under Pressure but Limited Divergence
Peripheral government bonds are also under pressure, but no obvious disorder has appeared within the eurozone. Italian 10-year yields rose along with Germany's, showing that the current driving factors are still global energy and interest rate expectations, rather than a single sovereign risk event. The Italy-Germany spread remains within a relatively controlled range, which means the market has not interpreted this volatility as a renewed risk of debt fragmentation in the eurozone but rather as a "market-wide reevaluation driven by oil prices." As long as there is no new shock to the EU fiscal framework and the ECB's anti-fragmentation tools remain credible, German and Italian bonds are likely to continue moving in tandem, with the former reflecting risk-averse rates and the latter carrying a higher beta.
