Euro zone bond yields fall after signs of progress in US-Iran talks

Euro zone government bond yields fell on Monday as renewed optimism in US-Iran peace talks eased concerns about the war's impact on growth and inflation in the region.

Euro zone government bond yields are lower on Monday ​on signs that progress had been ​made in peace talks between the U.S. ‌and ​Iran over the weekend, easing worries that the process to end the war was breaking down. Mediators said a communications line had been set ‌up to help ensure safe passage for commercial ships through the Strait of Hormuz. Tehran's Islamic Revolutionary Guard Corps had declared the Strait shut on Saturday, though the U.S. military said commercial vessels had continued operating in the ‌waterway.

The renewed optimism saw Brent crude futures reverse an earlier rise to fall 1.9% to $79.06, easing ‌some worries about growth and inflation in the euro zone. Germany's 10-year bond yield, the benchmark for the bloc, was down 2 basis points (bps) at 2.966%. It rose 6 bps on Friday after peace talks were abruptly called off, highlighting the fragile nature of ⁠the ​current ceasefire. "The renewed closure ⁠of the Strait of Hormuz will add to the markets' wariness about swift progress towards a U.S.-Iran agreement," Commerzbank rates strategist Rainer ⁠Guntermann said in a note.

"As such, any rebound in Bunds is likely to remain limited while the 3% handle for ​10-year yields should provide support." ECB POLICY UNCERTAINTY

European Central Bank President Christine Lagarde is scheduled to ⁠testify before European Parliament on Monday. Her comments could help provide information about how the central bank assesses the current situation and ⁠whether ​it could tighten policy further, after becoming the first major central bank to raise interest rates since the start of the conflict. Expectations for further tightening have been tempered by positive peace talks, with markets ⁠pricing in about 35 basis points of tightening by year-end, implying one quarter-point hike and around a 40% ⁠chance of another.

Markets had ⁠been pricing in a further 40 bps of tightening after the ECB's hike on June 11. Germany's two-year yield, which is sensitive to changes in ECB rate ‌expectations, was down ‌2 bps on Monday to 2.626%.