European sovereign yields ended the week higher on Friday, capping off a turbulent seven days marked by the emergence of a U.S.-Iran agreement, an unexpected hawkish shift among U.S. policymakers, and renewed uncertainty over the stability of the accord.
The yield on the German 10-year Bund - the eurozone benchmark - climbed to 2.95% after earlier in the week touching its lowest levels in two months.
Market sentiment took a hit when U.S. Vice President JD Vance cancelled a planned trip to Switzerland that had been scheduled to begin talks on implementing the 14-point agreement reached between Washington and Tehran. The cancellation raised fresh doubts about how durable the deal would prove in practice.
In response to the scaling-back of confidence in implementation, crude oil prices moved higher, rising by nearly 1% on the session.
The middle of the week had already produced pronounced market swings driven by U.S. central bank signals. A majority of Federal Reserve policymakers surprised markets by indicating a likelihood of a rate hike later this year, upending expectations of an imminent pause or near-term cuts.
As a result, investors rapidly adjusted their outlooks, pushing the probability of an October rate increase to roughly 80%.
These developments contrasted with market behaviour at the start of the week, when eurozone debt had rallied after reports of the U.S.-Iran accord and the reopening of the Strait of Hormuz. During the height of the prior conflict, sharply higher oil prices had pushed yields toward multi-month highs, with markets pricing in a potential inflation shock that could trigger European Central Bank rate increases.
That dynamic shifted after oil prices fell about 10% over the course of the week, allowing investors to reassess the inflation outlook and giving stressed eurozone bonds some respite as geopolitical risk premiums receded.
Shorter-dated, policy-sensitive instruments also reacted: the two-year note, which tracks market expectations for near-term ECB policy, rose to 2.628%.
Commenting on the bloc's outlook, ECB Chief Economist Philip Lane said the euro area economy could hold up positively in the context of higher interest rates.
With crude edging up and central-bank signals still in play, markets enter the coming week with heightened sensitivity to both geopolitical developments surrounding the U.S.-Iran agreement and incoming signals from monetary policymakers.