The situation in the Middle East is volatile, causing oil prices to fluctuate greatly, and the European bond market is also shaking! The two-year German bond yield surged and then retreated.

On Monday, due to market expectations that the European Central Bank will raise interest rates two more times by early 2027, the yield on German two-year government bonds briefly rose to a two-year high and then retraced its gains. The borrowing costs in the Eurozone fluctuated with the movement of oil prices. International oil prices plunged following news of negotiations between the US and Iran. As of the time of writing, WTI crude oil futures prices fell by 2.04% to $80.11 per barrel; Brent crude oil futures prices fell by 1.59% to $86.70 per barrel, after briefly surpassing $90. It was reported that despite ongoing conflicts between the US and Iran, the negotiation process has not completely stopped. The Iranian Foreign Ministry stated on Monday that they are open to continuing negotiations with the US based on national interests. The spokesperson for the Iranian Foreign Ministry, Bagaei, mentioned that Iran has received proposals from the mediators of the US-Iran talks, but did not disclose specifics. He also mentioned that the Iranian Interior Minister will visit Pakistan on the same day to discuss bilateral matters. Additionally, it was reported that the mediators have proposed a 10-day ceasefire to discuss a temporary agreement between Iran and the US. The more policy rate-sensitive German two-year government bond yield stabilized at 2.78%, after rising to 2.8174%, the highest level since July 2024. In the currency market, the European Central Bank's deposit rate is expected to reach 2.67% in December and 2.75% in February 2027, higher than the current 2.25%. Furthermore, the market has fully priced in the rate hike expected in September. Analysts pointed out the strong interlink between oil prices and short-term interest rates in the Eurozone, a logic that dominated market trends from March to May this year, with recent geopolitical tensions reinforcing their correlation. The yield on the benchmark German ten-year government bond, considered the Eurozone's benchmark, rose by 1 basis point to 3.13%. In mid-May, the yield reached 3.20%, the highest level since May 2011. Market participants continue to expect the European Central Bank to maintain interest rates at their policy meeting later this week. Giada Giani, economist at Citi, stated, "Although tensions in the Middle East are rising again and oil prices are increasing, they are still slightly below our base-case assumption in June, and signs of the second-round impact remain limited." A survey released by the European Central Bank on Monday showed that businesses in the Eurozone expect a moderate increase in selling prices and a slowdown in wage growth. This further indicates that recent energy-driven inflation surge has not yet caused a second-round impact on prices. France's Industrial Bank stated, "Crude oil prices are still far below their spring highs, but refined oil prices show a different trend, with diesel and gasoline prices behaving as if crude oil had reached $110 to $120 per barrel." "For the European Central Bank, one reassuring point is that the current price increase is still mostly driven by oil, natural gas and electricity prices are slowly rising but have not yet become major sources of inflationary pressure." The yield on Italian 10-year government bonds rose by 1.5 basis points to 3.96%. The yield spread between Italian and German government bonds is 80 basis points. Before the attack on Iran in February, the spread was 63 basis points, but by the end of March, it reached 103.62 basis points, marking the largest difference since June 2025. This spread is considered a key indicator of risks, market sentiments, and fragmented risks in the Eurozone financial markets.