Euro zone yields fall after Iran raises prospect of Hormuz reopening

Euro zone bond yields fell for a second straight day on Tuesday, hitting their lowest in almost two weeks after Iran raised ‌the prospect of reopening the Strait of Hormuz if the US eases military pressure, sending oil prices lower.

Germany's 10-year bond yield, the benchmark for the bloc, fell 1 basis point to 3.441% after rising as much as 4 bps earlier in the session. It fell 7 bps on Monday ‌to its lowest since September 10 as energy prices retreated. A senior Iranian official told Reuters that the strait, which carried about a ‌fifth of global energy supplies before the war, could reopen within seven days if the US also lifts its blockade of Iranian ports.

The official added that Iran's delegation to a UN meeting in New York this week has full authority to revive diplomacy over the conflict. Oil prices fell after Japan's Kyodo news agency first reported the ⁠Iranian position ​and extended losses following the official's ⁠comments to Reuters.

The drop in energy prices helped pull yields lower globally after a surge in recent weeks fuelled by expectations of further interest-rate hikes to combat energy-driven ⁠inflation. Traders are pricing in around 35 bps of additional European Central Bank tightening this year, down from 40 bps on Friday. Germany's two-year bond yield, which ​is sensitive to interest-rate expectations, fell 3 bps to 3.174%, following a 6-bp drop on Monday.

Rabobank senior rates strategist Lyn Graham-Taylor ⁠said lower oil prices following the Iranian comments were weighing on bond yields. Brent crude futures fell 2% to $98 a barrel, their lowest in two weeks. Prices were also pressured ⁠by ​a Reuters report that Saudi Arabia had restarted its East-West Pipeline at a low rate after drone attacks forced its closure earlier this month.

Tensions in the Middle East remain elevated, however, with Houthi fighters pushing to seize more Saudi-held territory in Yemen. The rapid advance by ⁠the Iran-backed group has widened the regional conflict in recent weeks. French government bonds underperformed their peers as investors continued to focus on France's ⁠budget debate and the run-up to the ⁠2027 presidential election.

The spread of French over German 10-year yields rose 2 bps to 104 bps. The gap, a gauge of the risk premium attached to French debt, hit its highest since 2012 ‌on Friday at 105 bps ‌but fell on Monday as yields dropped.