Euro zone bond yields retrace falls and tick up as oil rises

Euro zone bond yields rose on Tuesday, partially reversing some of the steep falls seen a day earlier, as oil ‌prices edged higher after hitting an almost two-week low below $100 a barrel. Germany's 10-year bond yield, the benchmark for the bloc, rose 3 basis points to 3.481%. It fell 7 bps to the lowest since September 10 the previous day.

Energy prices rose as tensions in ‌the Middle East remained high, with Houthi fighters pushing to seize more Saudi-held territory in Yemen. The rapid advance by ‌the Iran-backed Houthis has widened the Middle East conflict in recent weeks. Brent crude oil futures were last up almost 2% to $102 a barrel.

The global benchmark oil price fell as low as $99 a barrel on Monday on hopes that diplomacy over the Iran war will get a chance at a UN meeting ⁠this ​week, and following reports of partial recovery ⁠in oil shipments from Saudi Arabia despite the Yemen conflict. Monday's drop in oil prices helped battered bond markets recover some poise, with yields down sharply ⁠across the euro zone – which relies heavily on imported energy.

Italian 10-year yields rose 4 bps on Tuesday to 4.376% after falling 10 bps on ​Monday. French 10-year yields also climbed 4 bps after falling 10 bps and were last at 4.509%. Euro zone bond yields ⁠have risen to multi-year or even multi-decade highs in recent weeks, along with those in the US, Britain and Japan, as the Middle East energy shock – ⁠along ​with resilient growth – has caused traders to ramp up their bets on interest-rate hikes.

Investors have also cited concerns about high government debt levels and large amounts of borrowing in bond markets by companies funding AI investments. In the euro zone, France has been ⁠under particular scrutiny from investors as it struggles to reduce its budget deficit of more than 5% of GDP and heads into ⁠a divisive election next year.

The ⁠spread of French 10-year yields over their German equivalent rose 1 bp to 103 bps on Tuesday. The gap, a gauge of the risk premium attached to French debt, hit its highest since ‌2012 on Friday ‌at 105 bps but fell 3 bps on Monday.