- Eurozone government bond yields fell across the board to about a one-month low on Monday, mainly due to renewed optimism about a U.S.-Iran agreement to reopen the Strait of Hormuz, directly weakening the input inflation pressure brought by oil prices.
- International oil prices fell significantly by 5.5% amid expectations of easing conflict, prompting a comprehensive downward adjustment in the European fixed income rate market's bets on ECB tightening rate hikes by the end of the year.
- The pricing expectation for the ECB's December deposit rate in the money market fell from 2.67% on Friday evening to close to 2.6%, and the probability of a rate hike at next month's policy meeting also slipped from 80% to 75%.
Borrowing Costs Reassessed as Oil Prices Plummet
Driven by hopes of easing geopolitical tensions in the Middle East, oil prices fell by 5.5% today, injecting strong rebound momentum into the recently pressured Eurozone sovereign bond market. Although the U.S. and Iran have not made substantial breakthroughs on key differences and have even downplayed the possibility of reaching a final agreement soon, continued diplomatic progress has been enough to cause a valuation adjustment in the energy market, which previously included high geopolitical premiums. Due to Europe's high dependence on external energy, the marginal decline in oil prices directly translates into a cooling of market expectations for short- to medium-term inflation, leading to a collective decline in Eurozone bond yields. If subsequent diplomatic negotiations stall again, the oil supply premium may once again push up bond market yields.
Policy Rate Expectations Marginally Shift Dovish
Short-term policy rate-sensitive instruments reacted most sharply during the session. The German two-year bond yield fell sharply by 11.7 basis points, hitting a new low of 2.52% since May 7. This yield had once reached 2.771% in late March due to escalating conflicts, marking the highest level since July 2024. Meanwhile, the pricing of the ECB's policy path in the money market showed significant loosening. Derivatives market data indicates that traders have lowered their expectations for the ECB's December deposit rate endpoint from the previous 2.67% to close to 2.6%, while the current deposit rate remains at 2%. For the upcoming June policy meeting, the probability of a first rate hike next month has also dropped from the previous 80% to 75%, indicating that the pressure for aggressive monetary tightening in the short term has been temporarily relieved.
Term Spreads and Core Bonds Warm Up Collectively
As a benchmark for long-term borrowing costs in Europe, the German 10-year bond yield fell by 10.5 basis points to 2.9302%, hitting a new low since April 8. In contrast, this indicator had reached 3.13% in late March, the highest level since June 2011. In peripheral countries, Italy's 10-year bond yield fell more sharply, down 12.5 basis points to 3.6425%, reaching the lowest point since March 18. The yield spread between Italian and German 10-year bonds has now narrowed to 70 basis points. Analysts point out that although there are signs of easing in the geopolitical crisis, ECB Governing Council member and Bank of Greece Governor Yannis Stournaras maintained a cautious stance on Monday, emphasizing that if inflation temporarily but significantly exceeds the target, monetary policy should still be adjusted towards a tighter direction, indicating that bond market bulls should remain attentive to the long-term stickiness of inflation. If core inflation rebounds, market pricing may be reassessed.
