Germany’s 10-year Bund yield rose above 3.1%, hitting its highest level since May 21, as the Middle East conflict raised concerns that higher energy prices could fuel inflation and interest rates.
The two-year bond yield, more sensitive to policy rate expectations, also reached 2.8%, its highest since July 2024.
The US military continued strikes against Iran after President Donald Trump reinstated a blockade on Iranian shipping and proposed a 20% fee to guard the Strait of Hormuz, increasing uncertainty over energy flows.
Markets responded by betting on further European Central Bank rate hikes, with money markets pricing in a deposit rate of 2.70% by December, up from the current 2.25%, and fully expecting a September hike.
In the US, Fed Governor Christopher Waller warned that the central bank may need to raise rates "in the near term" if inflation remains above the 2% target.
Investors now await remarks from Federal Reserve Chair Kevin Warsh and US inflation data later today.