Iran strikes push German yields to two-year peak
Escalating US military strikes against Iran have driven German bond yields to a two-year high as money markets fully price in an ECB rate hike by September.
The U.S. military conducted a third consecutive night of strikes against Iran on Monday. In tandem, President Donald Trump reinstated a blockade on Iranian shipping and proposed a 20% fee for vessels requiring military escort through the Strait of Hormuz. The sudden escalation triggered an immediate repricing of European government debt.
Germany’s two-year yield, which is highly sensitive to European Central Bank policy expectations, rose 8 basis points to 2.798%. This marks the highest level for the benchmark since July 2024. Money markets now fully price a September rate hike, expecting the ECB deposit rate to reach 2.70% by December, up sharply from the current 2.25%.
The sell-off extended further along the curve, with Germany’s 10-year yield adding 4 basis points to close at 3.11%. While this remains below the mid-May peak of 3.20%—the highest print since May 2011—the broader trajectory underscores a profound shift in inflation sentiment. Investors are abandoning bets on ECB easing, prioritizing inflation protection instead.
Peripheral European markets showed signs of stress, with Italy’s 10-year yield climbing 7.5 basis points to 3.94%. The yield gap between Italian and German 10-year bonds widened to 80 basis points. This spread has expanded significantly from 63 basis points before the recent attack on Iran, though it remains below the late March peak of 103.62 basis points, the widest since June 2025.
Amid the global rate repricing, major Asian institutions are moving to secure offshore capital before conditions tighten further. State Bank of India raised an additional $200 million through an existing bond issue maturing in July 2029. The bonds, issued through SBI’s London branch on July 17, indicate continued international demand for high-grade Indian banking paper despite the rising cost of global funding driven by the Middle East conflict.
