Bond markets react to renewed Middle East uncertainty
Government bond yields rose across major global markets Monday as uncertainty over U.S.-Iran peace talks persisted. The increases spanned U.S. Treasurys, eurozone government bonds, British gilts, and Japanese government bonds, reflecting a broad investor repricing of geopolitical risk after Iran attacked a U.S. military base in Kuwait in retaliation for American strikes on military targets in southern Iran.
The Wall Street Journal reported that the Iranian attack reignited concerns about the fragile state of negotiations even as both Washington and Tehran signaled willingness to reach a deal. Oil prices increased as a result, renewing worries about inflation that pushed bond yields higher.
“Oil has found its way back onto the worry list, as hopes for a cleaner U.S.-Iran breakthrough run into fresh uncertainty,” Matt Britzman, an analyst at Hargreaves Lansdown, said in a note.
Eurozone Bunds rise toward the 3% threshold
In the eurozone, the 10-year German Bund yield rose 4.6 basis points to 2.974%, according to Tradeweb data. The yield had closed at 2.94% on Friday.
Rainer Guntermann, a rates strategist at Commerzbank, said German 10-year Bunds remain a buy opportunity if the yield trades above 3%, noting that bond markets remain in a near-term holding pattern as Trump has not announced his “final determination” on a preliminary deal with Iran. Ultimately, however, hopes prevail that a possible framework agreement will pave the way for gradually normalizing traffic in the Strait of Hormuz, Guntermann said.
U.S. Treasury curve steepens on inflation fears
In the United States, Treasury yields rose in Asian trading with larger increases in shorter maturities. The two-year Treasury yield climbed 1.9 basis points to 4.032%, the 10-year yield rose 1.6 basis points to 4.468%, and the 30-year yield edged up 0.1 basis point to 4.993%, according to Tradeweb data.
The pattern — short and intermediate yields rising faster than long-term yields — reflected growing inflationary expectations fueled by Middle East uncertainty and the prospect that elevated oil prices could keep central banks from cutting rates.
Gilts and JGBs also sell off
In London, 10-year gilt yields rose 3 basis points to 4.837%, tracking moves in U.S. and European government bonds. Gilt yields remained well below highs above 5.1% reached in mid-May.
In Tokyo, Japanese government bonds fell in price as the 10-year JGB yield rose 2.5 basis points to 2.680% during the morning session. The sell-off reflected expectations that prolonged U.S.-Iran tensions could sustain high crude oil prices, keeping both Japan’s inflationary pressures and Bank of Japan rate-increase expectations elevated.
Diplomatic picture remains muddled
The diplomatic backdrop kept markets on edge. Trump said in the Fox News interview aired Saturday that the U.S. was “close to a very good deal” but suggested a potential return to fighting as an alternative. Ghalibaf responded Sunday, saying there would be no deal unless Iran’s rights were secured.
Despite the near-term uncertainty, analysts said investors continued to expect that an agreement would ultimately be reached. The market had already priced in some relief from a possible ceasefire extension and reopening of the Strait of Hormuz, according to the Hargreaves Lansdown note. But the risk premium has not disappeared, particularly with the strait remaining central to global energy flows.
Going deeper: Read MSI’s analysis of Global bond market repricing dynamics →