Euro zone bond yields nudge higher as oil rises, inflation data in focus

Euro zone bond yields nudged higher on Monday ​to start a week packed with key ​data releases as oil prices climbed again ‌on ​doubts that the U.S.-Iran war will be resolved and the Strait of Hormuz reopened anytime soon.

The yield on Germany's 10-year government bond, the benchmark for ‌the euro zone, was last a touch higher at 3.6303% — around its highest since June 2009. It recorded its seventh straight weekly rise last week and is on track for an over 30 bp monthly rise.

US President Donald ‌Trump over the weekend rejected a peace deal from Iran to reopen the Strait of Hormuz and ‌end fighting. The stalemate between the US and Iran sent oil prices higher again, with Brent crude futures last around 2% higher on the day at $106.46 a barrel. Elevated energy prices and hawkish central banks, which have pushed up expectations for higher interest rates, have ⁠kept government ​bonds around the world under ⁠pressure in recent months. The European Central Bank has already hiked interest rates twice this year to combat inflation, and money markets were ⁠last pricing in at least one more increase this year.

After data last week again reflected unexpected economic resilience in ​the euro zone, attention now shifts to flash inflation figures due this week which could again ⁠shift rate expectations. Euro area inflation is expected to have accelerated to 3.6% in September according to a Reuters poll, from 3.2% in August. The ⁠rise ​is expected to be driven by energy prices again, but policymakers and investors alike will also be closely watching any changes to services and food inflation prints to assess if any second-round inflation effects might ⁠be starting to emerge.

German 2-year government bond yields, which are more sensitive to interest rate expectations, were last ⁠up 2.7 basis points ⁠to 3.3134%. They recorded their seventh consecutive weekly rise last week, and were headed for an over 39 bp monthly jump — their biggest since March, just after the ‌Iran war ‌broke out at the end of February.