Eurozone Bonds Surge Amid Middle East Tensions and ECB Rate Hike Bets

Eurozone benchmark Bund yields hit a 15-year high due to expectations of ECB rate hikes following Middle East tensions. Market bets on ECB tightening increase as inflation concerns grow. The anticipation of significant hikes reflects worries over long-term energy disruptions and rising bond yields across French and German markets.

Eurozone benchmark Bund yields soared to their highest levels in 15 years on Friday, surpassing the 3% mark as money markets anticipated three European Central Bank (ECB) rate hikes. The escalation follows continuing unrest in the Middle East, with U.S. President Donald Trump giving Iran 10 days to reopen the Strait of Hormuz or face severe consequences.

Investor focus intensified on ECB tightening strategies since the February 28 start of the Iran conflict, with concerns centering on oil-induced inflation. ECB President Christine Lagarde's warnings about prolonged energy disruptions heightened these fears, pushing long-dated bonds even higher amidst expectations of prolonged elevated rates.

As markets adjusted, the ECB deposit facility rate was forecasted to reach 2.70% by September. Some economists predicted potential rate hikes in June and September, escalating to 2.5%. Meanwhile, French and German bond yields climbed, with France facing more pressure due to its energy import dependency and fragile finances.