Euro zone bond yields rise as oil climbs, inflation data in focus

Euro zone government bond yields rose on Monday at the start of a week packed with key economic data, as oil prices climbed on doubts that the US-Iran conflict ‌will be resolved soon and that the Strait of Hormuz will reopen. Germany's 10-year bond yield, the euro zone benchmark, was last up 1.8 basis points at 3.6416%, around its highest level since June 2009.

The yield recorded a seventh consecutive weekly increase last week and is on track for ‌a monthly rise of more than 31 bps. US President Donald Trump at the weekend rejected an Iranian proposal to reopen the Strait ‌of Hormuz and end hostilities. The continued impasse pushed oil prices higher, with Brent crude futures up about 4% at $108.50 a barrel.

Rising energy prices and expectations of higher interest rates have kept pressure on government bonds globally in recent months. The European Central Bank has already raised rates twice this year to combat inflation, and money markets ⁠are pricing ​in at least one further increase ⁠by year-end. Looking ahead to October 2027, they are pricing in roughly 100 bps of further tightening.

After data last week again pointed to unexpected economic resilience in the euro ⁠zone, attention now turns to flash inflation figures due later this week that could reshape interest-rate expectations. Euro area inflation is expected to have accelerated to 3.6% in ​September from 3.2% in August, according to a Reuters poll.

Nomura senior European economist Andrzej Szczepaniak said he would be "very unsurprised ⁠to see a jump in headline inflation", citing data showing higher vehicle fuel prices amid elevated oil costs. "For me, the key focus really is the extent to which you ⁠see a ​further firming in core goods prices," he said, adding that this would indicate the extent to which producers are passing on higher costs from elevated energy prices to consumers.

Services inflation, another closely watched measure for policymakers, is unlikely to change significantly, Szczepaniak said. He added ⁠that service-sector prices are unlikely to rise materially until wage growth accelerates. Germany's 2-year bond yield, which is more sensitive to interest-rate expectations, was ⁠up 3.3 basis points at 3.3196%.

The ⁠yield posted its seventh straight weekly gain last week and is on course for a monthly increase of about 40 bps, its biggest rise since March, shortly after the Iran war began in late February. Italy's ‌2-year government bond yield ‌was last around 5 bps higher at 3.6132%.