Euro Zone Bond Yields Rise Amid Mid-East Tensions and Fed Meeting Anticipation

Euro zone government bond yields rose marginally on Tuesday amid heightened uncertainty regarding the ongoing conflict in the Middle East.

Investors are on high alert as they await the Federal Reserve's policy meeting scheduled later this week. U.S. President Donald Trump has expressed a desire for a definitive resolution to Iran's nuclear issue, hinting at possible high-level engagements between American and Iranian officials as military tensions intensify.

The German 10-year benchmark yield increased by one basis point to 2.54%, while two-year Schatz yields also climbed by a point to 1.85%. According to Philippe Waechter, Ostrum AM's chief economist, the regional turmoil represents a minor shock, and outcomes could have significant implications. He noted that long-term interest rates in major economies remain largely unchanged while investors adopt a cautious stance amid uncertainty.

The crude oil market remains stable, with prices not surpassing early-year levels despite potential supply increases from Saudi Arabia. The International Energy Agency assured that the global oil market is well-supplied. Brent crude futures gained over 1.5% following a previous downturn. Markets have slightly adjusted their expectations for the European Central Bank's monetary easing trajectory.

The ZEW Economic Research Institute reported a surprising boost in German investor confidence for June. As the Federal Reserve begins its two-day meeting, fresh U.S. economic data signals potential risks of a commodity price shock, alongside weaker retail sales and factory performance in May.

ECB President Christine Lagarde emphasized the importance of earned international currency credibility while citing challenges facing the European Union. Meanwhile, Italian bonds slightly lagged behind German Bunds, with a minor rise in the yield gap, reflecting investor sentiment shift.

(With inputs from agencies.)