German two-year yields hit their highest since July 2024 as oil above $90 a barrel lifted market pricing for two more ECB rate increases by early 2027.
The European Central Bank is still expected to leave interest rates unchanged at its policy meeting later this week after raising its key rate in June to 2.25% from 2%, its first increase since 2023. But rising oil prices tied to escalating U.S.-Iran hostilities and disruption to shipments through the Strait of Hormuz have pushed up euro zone bond yields and reinforced expectations that the ECB may need to tighten further. Germany’s two-year government bond yield rose 2 basis points to 2.79% after touching 2.8174%, its highest level since July 2024, while money markets fully priced a September rate hike and showed the ECB deposit rate at 2.69% in December and 2.77% in February 2027. Germany’s 10-year yield rose to 3.15% and Italy’s 10-year yield to 3.83%, widening the spread between Italian and German bonds to 82 basis points, the highest since early May.