Euro zone bond yields dip after surging to seven-week high on Iran fears

Euro zone bond yields dipped on Thursday, but remained at their highest in seven weeks, as oil prices steadied after surging on fears of a U.S.-Iran deal collapse.

Euro zone bond yields dipped on Thursday as oil ​prices steadied, but they remained at around their ​highest in seven weeks after surging the ‌previous ​day on fears of a collapse in the deal between the U.S. and Iran to end their war.

Germany's 10-year bond yield fell 1 basis point (bp) to 3.074% ‌after jumping 10 bps on Wednesday to hit 3.094% early on Thursday, the highest since mid-May. Oil prices inched up on Thursday after rising more than 5% on Wednesday following U.S. President Donald Trump's comments that he thought the memorandum of ‌understanding with Iran to end the war was "over". Brent crude last traded 1% higher at $79.20 a barrel but ‌remained below Wednesday's peak of $80.59.

Energy prices have fallen sharply since the U.S. and Iran reached a deal in mid-June, which allowed flows to resume through the key Strait of Hormuz. But commodities markets are highly sensitive to any signs that trade through the waterway could again stop. The ⁠U.S. military ​said on Wednesday it ⁠launched fresh strikes on Iran to keep the strait open to shipping, triggering Iranian attacks on Kuwait and Bahrain in the latest escalation.

Germany's 2-year ⁠bond yield, which is sensitive to European Central Bank rate expectations, fell 2 bps on Thursday to 2.679% after rising 12 bps ​the day before. Yields move inversely to prices. Traders in money markets were pricing in 37 bps of ⁠further ECB monetary tightening on Thursday, down from 40 bps at one point on Wednesday but well above the 21 bps expected at the start ⁠of ​the week.

"The next couple of days would be key to deciding whether we get further escalation, or this was another show of force," said Mohit Kumar, chief European economist at Jefferies. Italy's 10-year bond yield fell 2 ⁠bps to 3.887% after rising 13 bps on Wednesday, when the closely watched spread between Italian and German yields rose ⁠to its highest since early May ⁠at 81 bps.

France's 10-year yield was also down 2 bps. The spread between French and German yields closed at 82 bps on Wednesday, the highest since October last ‌year, as investors sold ‌the bonds of more indebted countries.