Euro zone bond yields hover near 15-year highs on Iran war inflation fears

Euro zone government bond yields remained near their highest levels in more than 15 years on Monday as investors weighed the risk that a prolonged war in Iran could keep energy prices elevated and reignite inflation across the bloc.

Germany's 10-year Bund yield held around 3.20%, close to the late-July peak of 3.21% — the highest since May 2011, according to TradingView. The broader euro area 10-year benchmark stood at 3.51% as of mid-August. The moves reflect a bond market increasingly skeptical that the European Central Bank can return to easing anytime soon.tradingeconomics+1

ECB Rate Path in Focus

Money markets are now pricing the ECB's deposit rate at 2.76% by March 2027, up from the current 2.25%, with a more than 90% probability of a rate increase at the September meeting. The ECB raised rates in June for the first time in nearly three years, lifting the deposit rate a quarter point to 2.25% in what Reuters described as an effort to curb inflation "before a surge in energy costs triggered by the Iran war spreads more broadly". The bank held steady in July, citing high uncertainty over "the intensity and duration of the shock".moderndiplomacy+2

"We see it as a maximum one hike from the ECB," said Mohit Kumar, an economist at Jefferies, noting that oil prices remained below the ECB's more severe scenarios.moderndiplomacy

Geopolitical Risks Shape Global Sentiment

The broader market backdrop remains unsettled. Iran called on Washington to accept defeat on Saturday, while President Donald Trump warned Americans to prepare for continued high fuel prices. Brent crude closed Friday at $88.67 per barrel, and gold continued to trade near record levels above $4,370 per ounce as safe-haven demand persisted.investing+2

U.S. equities closed lower on Friday, with the S&P 500 easing 0.20% from its record high and the Dow Jones Industrial Average falling 108 points. The University of Michigan's preliminary August consumer sentiment index dropped to 51, below forecasts of 55, while year-ahead inflation expectations rose. The yield on the 10-year U.S. Treasury note remained near the 19-month high of 4.75% reached earlier in the week.investing

A Difficult Balancing Act

The yield spread between 10-year Italian government bonds and German Bunds stood at 77 basis points, up from 63 basis points in February before the attack on Iran. The widening gap underscores the uneven toll the conflict is taking across the euro zone.moderndiplomacy

For the ECB, the policy dilemma is acute: higher energy costs risk prolonging inflation, but tightening too aggressively could further weaken an economy that grew just 0.40% quarter-on-quarter in the second quarter of 2026. Attention this week turns to the minutes of the Federal Reserve's latest meeting, which included three dissenting votes, alongside flash purchasing managers' indices and U.S. housing data.business-standard+1