Eurozone government bonds edged higher on Wednesday as investors held back after a plunge earlier this week on concerns that Middle East wars would fuel inflation.
President Donald Trump had ordered the U.S. International Development Finance Corporation to provide political risk insurance and financial guarantees for maritime trade in the Gulf.
“U.S. insurance for ships passing through the Strait of Hormuz could be a game-changer if successful,” said Mohit Kumar, an economist at Jefferies, adding that Gulf states joining the conflict would signal an early end to the war.
Iran has already launched several retaliatory attacks in the Gulf region.
“However, this would require the near-total destruction of Iran’s naval capabilities and/or pressure to allow passage of ships from allies, including China,” Jefferies’ Kumar added, arguing that he expects the war to last at least several weeks.
Germany’s 10-year bond yield, the euro zone’s benchmark, rose 0.5 basis point to 2.78% after hitting 2.815% on Tuesday, its highest level since February 11.
The country’s two-year bond yield, which is sensitive to policy expectations, fell 1 basis point to 2.17%.
Money markets are pricing in a 40% chance of a rate hike in December, down from 60% earlier in the session and up from last Friday’s 40% chance of easing.
It also suggested there was a 60% chance of a rate hike by June 2027.
Data on Tuesday showed consumer prices in the euro zone rose to 1.9% from 1.7% in February, beating expectations of 1.7%.
U.S. Treasury yields rose in early London trading after rising slightly the previous day as oil prices continued to rise due to the Iran war, with the benchmark 10-year Treasury yield rising 3.5 basis points to 4.09%.
Italy’s 10-year government bond yield was unchanged at 3.50%. The gap against German government bonds was 71 bps, up from 63 bps last Friday. In mid-January, it fell to 53.50bps, its lowest level since August 2008.
(Reporting by Stefano Rebaudo; Editing by Thomas Derpinghaus and Nivedita Bhattacharjee)
