By Stefano Rebaudo
April 13 (Reuters) - Euro zone government bond yields edged up towards recent peaks on Monday after the United States and Iran failed to secure a deal to end the war, pushing oil prices higher and prompting traders to price in a 70% chance of a third ECB rate hike by December.
Brent crude futures climbed above $100 a barrel nL1N40V07F as the U.S. Navy prepared to block ships to and from Iran via the Strait of Hormuz nL6N40V09S, a move that could restrict Iranian oil exports.
Meanwhile,
money markets priced in an ECB deposit facility rate at 2.68% by year-end, implying two hikes and a 70% chance of a third move, from around 2.60% late on Friday.
They also indicated a 45% chance of a rate increase in April from 25% late on Friday. The deposit facility rate is currently at 2%.
Markets see the ECB leaning hawkish nL6N40S0JS even as an energy shock threatens to weigh on growth.
Germany’s 10-year government bond yield rose 1.5 basis points (bps) to 3.06%. It reached 3.13% in late March, its highest level since June 2011.
Analysts argued that while the truce was more fragile after the weekend, both parties were unlikely to let full-blown war resume.
“The temporary truce briefly reduced immediate tail risks, but the failure of negotiations over the weekend has underscored that the constraints that matter most for near‑term (energy) pricing remain unresolved,” said Tobias Keller, investment strategist at UniCredit.
Germany’s two-year yields, more sensitive to expectations for policy rates, were up 4 bps at 2.62%. They reached 2.771% in late March, their highest level since July 2024.
"In our view, a repeat of the 1970s appears as an unlikely scenario, even if the war escalates," said Antonio Gabriel, global economist at BofA, recalling that the global economy has gradually become less oil dependent since then.
EGB SPREADS WELL BELOW LATE MARCH HIGHS
Italy’s 10-year government bond yields rose 3.5 bps to 3.86%. They reached 4.142% in late March, the highest since July 2024.
The yield gap of Italian government bonds (BTPs) versus Bunds was at 79 bps. It was at 63 bps before the U.S.-Israeli war with Iran began and hit 103.62 during the conflict, the highest since June 20, 2025.
“We would probably need to see a more significant escalation for BTP-Bund spreads to test the March highs again,” said Hauke Siemssen, rate strategist at Commerzbank.
“BTPs should also underperform OATs (French government bonds) again this week as they are more susceptible to energy prices, while we expect the spread to re-tighten over the long term,” he added.
The French spread was at 64.50 bps from 58 bps before the conflict. Fitch confirmed nFWN3ZU1JL on Friday its A+ rating for France with a stable outlook.
(Reporting by Stefano Rebaudo; Editing by Susan Fenton)
