- The United States and Iran have reached a preliminary agreement to end the conflict and reopen the Strait of Hormuz, a crucial passage for about one-fifth of the world's energy transport, which is expected to return to normal. The price of Brent crude oil (BRN1!) has recorded a significant decline.
- Driven by falling inflation expectations, yields in the European bond market have collectively declined. The yield on Germany's 10-year government bond (DE10YT=RR), a benchmark for the eurozone, and the yield on the rate-sensitive two-year government bond both hit two-week lows.
- Expectations for further interest rate hikes by the European Central Bank (ECB) this year have cooled significantly, with the additional tightening priced in by the swap market narrowing from over 40 basis points to about 30 basis points.
Geopolitical Breakthrough Triggers Oil Price Correction
According to official disclosures from the United States and Iran, both parties have reached a preliminary agreement to end military conflict. The core content of the agreement includes lifting relevant U.S. sanctions on Iran and plans to officially reopen the world's most important energy chokepoint, the Strait of Hormuz, this Friday. About twenty percent of the world's oil and liquefied natural gas pass through this strait, and previous conflicts had sparked deep concerns about supply chain disruptions. Driven by this news, the global benchmark Brent crude oil (BRN1!) futures price showed a sharp decline on Monday, with a single-day drop of 4.7%, finally closing at $83.22 per barrel, a level approaching the lowest point since early March this year. The rapid decline in energy prices has largely alleviated market anxiety over imported inflation.
Eurozone Government Bond Yields Under Pressure
As prices of crude oil and other commodities fell, expectations of reduced inflation pressure quickly spread to the fixed income market, with yields on major eurozone government bonds collectively declining during Monday's trading session. The yield on Germany's 10-year government bond (DE10YT=RR) fell to 2.945% during the session, hitting the lowest record since late May, and closed at 2.955%, down 4 basis points on the day. Meanwhile, the yield on Germany's two-year government bond (DE2YT=RR), which is more sensitive to the ECB's monetary policy rate direction, also showed a downward trend, dipping to a two-week low of 2.547% during the session and rebounding to 2.575% at the close, with a daily decline of 4 basis points. Additionally, bonds from non-core countries were also sought after, with Italy's 10-year government bond yield (IT10Y) falling 5 basis points at the close to 3.685%, hovering near a two-week low.
Currency Market Lowers ECB Tightening Expectations
The decline in energy prices has directly impacted market pricing of future policy paths for major central banks. After the ECB announced a rate hike last Thursday, concerns about recurring inflation had pushed expectations for further rate hikes this year to over 40 basis points. However, with the preliminary ceasefire agreement between the U.S. and Iran and the sharp drop in oil prices, analysts generally believe that the pressure on central banks to adopt aggressive rate hikes to curb inflation has been substantially reduced. Currently, swap market data shows that traders expect the ECB to implement only about 30 basis points of additional monetary tightening this year, indicating that the fixed income market is reassessing the future macro liquidity environment.
Framework Text Undetermined, Further Variables to Watch
Although the market has responded positively to the temporary easing of geopolitical tensions, professional institutions remain cautious about the final implementation of the agreement. Hauke Siemssen, a rate strategist at Commerzbank, pointed out that given officials' statements that the Strait of Hormuz will reopen on Friday, the market's general sense of relief is reasonable. However, since the specific agreement text has not yet been released, several key issues regarding the agreement remain unresolved. Iran's Deputy Foreign Minister Kazem Gharibabadi also stated that both parties will engage in in-depth negotiations on broader conflict issues during the upcoming 60-day ceasefire period, aiming to reach a more comprehensive agreement eventually. If the negotiation process encounters setbacks within 60 days, or if core inflation indicators rebound due to other factors, the pricing logic of the global bond market may face the risk of reevaluation.
