- The yield on Germany's 2-year government bonds fell by 7 basis points to 2.5671%, marking a new low since May 7, as market expectations for the reopening of the Strait of Hormuz by the US and Iran intensified.
- Forward rate agreements reassessed the European Central Bank's tightening pace, with the implied terminal deposit rate for December adjusted from 2.67% to 2.57%, and the probability of a rate hike next month simultaneously fell to 70%.
- International crude oil futures prices dropped by 5% in a single day, directly reducing the input pressure on core inflation in the Eurozone, leading to a broad decline in sovereign bond yields across both short and long ends.
The Eurozone sovereign bond market witnessed a collective decline in yields on Monday, as investors began to reassess the marginal changes in Middle Eastern geopolitical risks. The yield on Germany's 2-year government bonds, which is typically more sensitive to monetary policy rate paths, fell by 7 basis points, reaching a phase low of 2.5671%. Meanwhile, the yield on Germany's 10-year government bonds, a benchmark for Eurozone asset pricing, simultaneously fell by 5 basis points, closing at 2.9831%. Both short and long-term bond yields hit their lowest levels since May 7, indicating a systemic retreat of the inflation risk premium accumulated over the past few weeks due to geopolitical conflicts.
Cooling Expectations for Monetary Market Tightening
As signs of relief emerged from the global commodity supply chain disruptions, the Eurozone short-term interest rate futures market quickly revised the European Central Bank's aggressive rate hike path. Latest trading data shows that the options pricing for the ECB's December deposit rate has dropped from 2.67% last Friday evening to 2.57%, while the current operational rate is 2%. This indicates that traders have reduced the pricing of the rate hike magnitude by 10 basis points before the end of the year. Additionally, the probability of the ECB's first rate hike next month, as reflected by the market, has also deteriorated or adjusted from the previous 80% to 70%, suggesting a slowdown in the urgency of marginal tightening policies.
Transmission of Falling Energy Prices and Yield Curve Changes
Optimism in the peripheral geopolitical situation directly triggered profit-taking in the oil market, with oil prices recording a 5% drop in a single day. As the core issue of the previous conflict—the navigation problem of the Strait of Hormuz—showed signs of resolution, concerns about secondary inflation driven by the supply side were effectively alleviated. Against this backdrop, the trend of Eurozone bond yields showed a high positive correlation with oil prices. Besides core country Germany, bonds from peripheral countries were also favored by funds, with Italy's 10-year government bond yield falling by 6.5 basis points to 3.70% on Monday, indicating a general decline in borrowing costs across the Eurozone.
Marginal Policy Effects of US-Iran Geopolitical Game
The latest statement by US Secretary of State Marco Rubio on the US-Iran agreement became a key catalyst for the intraday shift in bond market sentiment. Although institutions like ABN AMRO pointed out that the fundamental contradictions of the conflict have not been completely resolved, the diplomatic game has led the market to preemptively de-risk the worst-case scenario. Benjamin Schroeder, a senior rate strategist at ING, stated that it is still unclear whether there will be sufficient progress around a potential agreement by mid-June to allow the European Central Bank to completely cancel rate hikes. If the Strait of Hormuz crisis is ultimately resolved quickly, given the overall fragile macroeconomic environment in Europe, its fixed income market will be the main beneficiary.
