Euro zone bond yields rise as oil climbs on Hormuz doubts

Synopsis

Bond yields in the Euro zone saw an uptick as oil prices surged, triggered by U.S. President Donald Trump's stance on Iran. The chances for a reopening of the Strait of Hormuz appear to have diminished. Investors are bracing for additional monetary tightening from the European Central Bank this year, while they're keenly watching for upcoming U.S. inflation data that could sway global interest rates.

Euro zone bond yields ticked up on Tuesday as oil prices rose after U.S. President Donald Trump demanded Iran pay its own compensation to the U.S., further dimming the prospect of an imminent deal to reopen the Strait of Hormuz.

Germany's 10-year bond yield rose 2 basis points to 3.198%, after ‌climbing 5 ⁠bps on ⁠Monday on the back of rising oil prices. Yields rise as prices fall and vice versa.

Trump on Monday said Iran should pay compensation for people killed in ​wars, attacks and protests, in response to Tehran's demands for compensation and an end to sanctions.

Iran earlier on Monday said it was ​nearing a final pact with Oman defining new ⁠shipping lanes ‌through the Strait, but repeated that the U.S. ​must meet ​conditions, including compensation, before opening the key energy waterway.

Oil ⁠prices ticked slightly higher on Tuesday, with Brent crude up 0.5% at $88.20 after rising 5% on Monday as the prospect of a near-term Hormuz deal slipped away.

Germany's 2-year bond yield, which is sensitive to European Central Bank rate expectations, rose 2 bps to 2.809% after rising 5 bps on Monday.

"We are back to the situation where there is no war ongoing, but the ‌Strait of Hormuz remains closed," Mohit Kumar, a senior European economist at Jefferies, said.

"The longer the Strait is ​closed, more ​inventories will be depleted ⁠and greater would be the impact on oil prices."

Traders in money markets were last pricing in 41 bps of further ECB monetary tightening ​this year, up from 37 bps late on Friday.

Bond markets were also waiting for Wednesday's U.S. CPI inflation report, which will influence the Federal Reserve's rate decisions and have knock-on effects for bond markets around the world.

Italian and French 10-year bond yields were both up 3 bps.

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