Oil Prices and Fiscal Fears Spark Euro Zone Bond Yield Spike

Euro zone government bond yields saw an increase on Wednesday, driven by rising oil prices, which added strain on longer-dated bonds. The market is also reacting to fiscal concerns, particularly involving the U.S. Germany's 10-year yield, a key euro zone benchmark, surged by 6 basis points to hit 2.66%, whereas Italy's 10-year yield jumped nearly 9 basis points to 3.7%. The upward movement was partly spurred by oil, as Brent futures increased over 1% following reports suggesting Israel's potential plans to strike Iranian nuclear facilities.

British inflation data exceeding expectations also contributed to lifting bond yields across the board. In April, Britain's annual inflation rate reached 3.5%, marking the highest since January 2024. Despite inflation aligning close to the European Central Bank's (ECB) 2% target, policymakers remain vigilant while setting rates. Market forecasts suggest the ECB may lower its key rate to 1.75% by year-end, down from 1.5% last month during heightened economic concerns triggered by tariffs.

Additionally, yields in Europe are trending upward this week, following the trajectory of U.S. Treasury yields, which have escalated due to ongoing concerns regarding the U.S. fiscal position amid legislative discussions over a tax-cutting bill. The U.S. 10-year yield rose by nearly 6 basis points to 4.54%. In this climate, longer-dated bond yields have been rising more noticeably than shorter-dated ones, prompting yield curves to steepen. The German two-to-ten-year yield curve reached its steepest in over a month, with larger demand premiums for longer-dated debt. Higher energy prices could further complicate the situation by embedding into persistent inflation and driving 'bear steepening' trends, warned Kenneth Broux of Societe Generale.

(With inputs from agencies.)