German bond yields hit two-year high as oil tops $90

German two-year government bond yields climbed to their highest level in two years on Monday as Brent crude surpassed $90 a barrel, driven by escalating U.S.-Iran hostilities in the Middle East, reinforcing market expectations that the European Central Bank will raise interest rates again before early 2027.

Oil Prices Reignite Inflation Fears

Brent crude jumped about 3% on Monday to surpass $90, its highest since June 11, after the United States and Iran expanded military strikes in the Middle East that have disrupted energy shipments through the Strait of Hormuz, according to Reuters. The move extended a 15.9% surge the previous week — the biggest weekly gain since April.reuters

The New York Times ↗ 1.30% reported that shipping activity through the Strait of Hormuz had declined sharply, while regional energy infrastructure was being targeted once again. The oil rally marks a dramatic reversal from early July, when Brent had fallen as low as $70.65 following a short-lived U.S.-Iran ceasefire.indexbox+1

Germany's two-year yield, which is particularly sensitive to monetary policy expectations, rose to 2.77% according to CEIC data, having climbed steadily from 2.75% on July 16. The 10-year Bund yield rose to 3.15%, extending a climb of 28 basis points in July.tradingeconomics+2

Markets Price Two More ECB Hikes

The bond selloff reflects growing bets that the ECB — which raised its deposit rate by 25 basis points to 2.25% in June — will tighten policy further. Markets are now pricing in two additional rate hikes by next spring, with a September increase fully priced in.ecb.europa+1

However, the ECB is widely expected to hold rates unchanged at its meeting on July 22-23. CNBC reported last week that higher oil prices had brought monetary policy back into question ahead of the meeting, though investors had largely written off a July hike.reuters+1

A Reuters report from late June noted that the surprisingly rapid retreat in oil prices at the time had eased urgency for the ECB to act in July, with policymakers favoring a September move. The renewed oil surge has complicated that calculus, though several ECB officials have indicated they see no clear signs of second-round inflation effects yet.tradingview+1

Cautious Voices Temper Expectations

The ECB's June baseline projections assumed oil prices that remain above current levels, and the central bank projected headline inflation averaging 3.0% in 2026 and 2.3% in 2027. Despite the renewed oil shock, some economists have urged caution. ECB policymakers Piero Cipollone and Martin Kocher have both suggested they see limited broader inflationary spillovers so far.ecb.europa+1

The IMF earlier this year said it expected the ECB to raise rates by about 50 basis points total in 2026 to maintain a neutral policy stance, followed by potential cuts in 2027.reuters