German government bond yields climbed on Monday, with the two-year yield touching its highest level in two years as rising oil prices amid escalating U.S.-Iran tensions strengthened market expectations that the European Central Bank (ECB) will continue tightening monetary policy.
According to Reuters, Brent crude prices jumped 3% to above $90 a barrel after worsening hostilities between the United States and Iran disrupted oil shipments through the Strait of Hormuz, raising concerns over inflationary pressures in the euro zone.
Germany's two-year government bond yield, which is highly sensitive to interest rate expectations, rose 2 basis points to 2.79% after touching 2.8174%, its highest level since July 2024.
Money markets are now pricing the ECB's deposit rate at 2.69% by December and 2.77% by February 2027, compared with the current rate of 2.25%. Traders have also fully priced in a rate hike at the ECB's September policy meeting.
Market analysts noted that the strong relationship between oil prices and short-dated euro zone bond yields, a trend that shaped trading during March, April and May, has re-emerged as energy prices continue to rise.
Germany's benchmark 10-year government bond yield also increased by 2 basis points to 3.15%. The yield had climbed to 3.20% in mid-May, marking its highest level since May 2011.
Despite the recent surge in oil prices, investors broadly expect the ECB to keep interest rates unchanged at its policy meeting later this week.
Citi economist Giada Giani said the recent rise in oil prices remains below the assumptions used in the ECB's June projections and that evidence of broader inflationary spillovers remains limited.
Elsewhere in the euro zone, Italy's 10-year government bond yield rose 3.5 basis points to 3.83%. The spread between Italian and German 10-year bond yields widened to 82 basis points, the highest level since early May.
The yield gap had narrowed to 63 basis points in February before tensions involving Iran escalated but widened sharply to 103.62 basis points in late March, its widest level since June 2025, reflecting heightened concerns over geopolitical risks and sovereign debt markets.
