Government bond prices across the euro area continued a run of gains on Wednesday, marking a fifth consecutive session of appreciation and the longest such streak since February. The move reflected a cooling in market expectations for inflation in advance of Kevin Warsh's inaugural meeting as Federal Reserve chair.
Markets also reacted to developments in oil markets. Brent crude dropped below $80 per barrel after the United States and Iran said they had reached agreement on a peace deal framework that is due to be signed in Geneva on Friday. The drop in oil prices was a key factor in the downward pressure on yields.
The fall in oil contributed to lower bond yields, while equities and rate-sensitive assets such as gold posted gains. Bond yields move inversely to prices, so the price advances corresponded with declining yields.
In Germany, the benchmark 10-year yield slipped by 1 basis point to 2.9295% as bond prices continued their longest winning streak since mid-February, before the onset of the Iran war. Despite the recent pullback, the German 10-year yield remains almost 30 basis points above its levels from late February, though it has eased from last month's 15-year peak close to 3.2%.
Shorter-dated government borrowing costs fell more modestly. Two-year yields - which tend to react more directly to shifts in inflation expectations and anticipated policy changes - moved down at a slower pace. Two-year Schatz yields were unchanged at 2.5853% on Wednesday, standing more than 55 basis points above their readings from February 27, the day before the war began.
The combination of receding oil prices and a tempering of inflation expectations ahead of a major central bank event helped sustain demand for euro-zone government debt. The market remained sensitive to both energy-market developments and the trajectory of inflation expectations as investors positioned themselves ahead of the Fed chair's meeting.
Summary
Euro-zone bond prices extended a five-day rally as inflation expectations cooled ahead of Kevin Warsh's first meeting as Federal Reserve chair. A drop in oil below $80 per barrel after a United States-Iran peace framework announcement lowered yields, while stocks and gold rose. German 10-year yields fell to 2.9295%, and two-year Schatz yields held at 2.5853%, remaining well above late-February levels.
Key points
- Euro-zone government bonds logged a fifth straight day of gains - the longest rally since February.
- Oil fell below $80 per barrel after the United States and Iran announced a peace deal framework, contributing to lower yields and supporting equities and gold.
- German 10-year yields eased to 2.9295% while two-year Schatz yields were steady at 2.5853%, both well above pre-war late-February levels.
Risks and uncertainties
- Oil-price volatility related to any shifts in the U.S.-Iran framework could reverse recent yield declines - impacting energy and fixed-income markets.
- Changes in inflation expectations around the timing of policy signals from the Federal Reserve chair's meeting could alter short-dated yields and market positioning - affecting bonds and rate-sensitive assets.
- Geopolitical developments tied to the Iran war remain a source of uncertainty for yields and market liquidity, given the reference to pre-war and post-war yield levels.