German two-year government bond yields climbed to their highest level in two years on Monday as rising oil prices, driven by escalating tensions involving Iran, strengthened expectations that the European Central Bank (ECB) will continue raising interest rates through early 2027. Brent crude oil surged 3% to above $90 per barrel after growing U.S.-Iran hostilities disrupted oil shipments through the Strait of Hormuz. Germany’s two-year bond yield rose to 2.79%, briefly touching 2.8174%, its highest level since July 2024. Money markets now fully price in an ECB rate hike in September, with the deposit rate expected to rise from the current 2.25% to 2.69% by December and 2.77% by February 2027.
Analysts noted that the close relationship between oil prices and short-term eurozone interest rate expectations, which influenced markets earlier this year, has re-emerged. Germany’s benchmark 10-year government bond yield also increased by two basis points to 3.15%, remaining near its highest level in more than a decade after reaching 3.20% in mid-May.
Despite the renewed geopolitical tensions, market participants still expect the ECB to keep interest rates unchanged at its policy meeting later this week. Citi economist Giada Giani said that although Middle East tensions and oil prices have risen, they remain below the ECB’s June baseline assumptions and have not yet triggered significant second-round inflationary effects. Meanwhile, Italy’s 10-year bond yield climbed to 3.83%, widening the yield spread over German bonds to 82 basis points, the highest since early May.
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