European sovereign bond yields eased for a second consecutive session on Tuesday as markets began to step back from the most severe inflation scenarios following confirmation of a preliminary U.S.-Iran truce.
The yield on Germany's 10-year - the eurozone's benchmark - slipped to around 2.94%, a two-week low. The two-year German note, which is particularly sensitive to near-term monetary policy expectations, also declined to roughly 2.57%, matching a two-week low.
U.S. President Donald Trump confirmed that a preliminary agreement to halt the three-month conflict had been signed, though detailed terms were not provided. The apparent cessation of hostilities pushed crude prices lower immediately, but market participants remain watchful for any persistent inflationary effects stemming from the conflict.
The truce places European sovereign debt at a delicate inflection point compared with peer markets in the United States. During the period of open conflict, U.S. Treasuries drew the bulk of classic safe-haven flows, while European paper lagged amid fears of a severe, localized energy shock.
Whether eurozone bonds can mount a sustained recovery depends heavily on how central banks interpret recent price moves - whether they will look through the temporary spikes or retain a restrictive stance. Investors are awaiting further clarity from at least three scheduled speeches by ECB policymakers.
"A clear time wedge persists between political rapprochement and traffic normalisation - and that wedge appears to have widened from the last bout of constructive headlines, reflecting the complexity and residual uncertainty surrounding the situation," analysts at Lloyds Bank said.
In the UK, gilt yields moved higher from two-month lows. The two-year gilt climbed to 2.94% after having fallen to its lowest level since late April on Monday. The 10-year gilt rose to about 4.8%, recovering from a two-month trough.
British sovereign debt continues to grapple with a large national budget deficit, weak growth indicators and sticky inflation running at 3.3%, alongside the prospect of a by-election. These factors have limited fiscal manoeuvrability and present a policy challenge ahead of Thursday's Bank of England meeting, where the market broadly expects the BoE to stay on hold.
Monetary policy divergence has already been on display: the European Central Bank moved decisively last week, raising rates to 2.25% to pre-empt potential inflationary fallout from the conflict, while the Bank of England is widely forecast to pause.
Market participants remain sensitive to developments in energy markets, central bank communications and political dynamics that could alter the inflation outlook and safe-haven demand patterns. In the near term, the path for eurozone and UK government bonds will hinge on incoming speeches, official guidance and any further clarity on the truce.