Euro zone bond yields fall as markets cling to peace talk hopes

Euro zone bond yields fell ​on Friday as investors reacted to signs ​of progress in Iran ‌peace talks, pulling ​government borrowing costs away from the multi-year highs reached earlier in the week. Germany's 10-year bond yield, the ‌benchmark for the bloc, fell 4 basis points (bps) to 3.062%, while Italian and French yields fell slightly further . Yields move inversely to prices.

The German 10-year yield hit a 15-year high ‌of 3.2% on Tuesday as investors braced for interest rate hikes after the disruption ‌from the Iran war sent energy prices surging. Yet Brent crude oil prices fell on Thursday and last traded at around $104 a barrel, compared to $113 on Monday, as both Iran and the U.S. ⁠reported ​some progress on ⁠peace talks.

U.S. Secretary of State Marco Rubio said there had been "some good signs" in talks. ⁠A senior Iranian source told Reuters on Thursday that no deal has been reached but ​that gaps have been narrowed. "Geopolitical headlines continue to drive market volatility," said Benjamin Schroeder, ⁠senior rates strategist at ING.

"Even if signals remain conflicting at times, there is a suggestion of progress – ⁠or ​at least a narrowing of the gap between the warring parties' positions." Germany's 2-year bond yield, which is sensitive to European Central Bank interest rate expectations, fell ⁠4 bps to 2.642%.

Traders in money markets on Friday priced in around 65 bps of ⁠rate hikes from ⁠the ECB this year, implying two increases and a 60% chance of a third. That was down from more than ‌70 bps earlier ‌in the week.

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