Euro zone sovereign bond yields climbed on Wednesday, moving to the strongest levels seen in roughly a month following remarks by U.S. President Donald Trump that cast doubt on an interim agreement with Iran and a subsequent jump in global oil prices.
Germany's 10-year Bund yield rose 8.5 basis points to 3.072%, reaching its highest reading since June 11. Traders reacted by pricing in a greater likelihood of further interest-rate increases from the European Central Bank this year. Money market indicators showed expectations for an additional 36 basis points of ECB tightening by the end of the year, up from 25 basis points as of Tuesday.
The move was not isolated to the long end of the curve. Germany's 2-year yield - a segment of the market especially sensitive to near-term ECB policy expectations - climbed 9 basis points to 2.682%, also its firmest level since June 11.
The market re-pricing followed comments made by Mr. Trump in Turkey ahead of a NATO summit when he was asked whether last month's memorandum of understanding intended to end the war with Iran remained in force.
"It's a very interesting question. To me, I think it's over. I don't want to deal with them,"Mr. Trump said.
Tensions in the Gulf region escalated in parallel. Iran's Revolutionary Guards said they targeted U.S. military sites in Bahrain and Kuwait on Wednesday after Washington launched strikes on Iran in response to attacks on tankers in the Strait of Hormuz. In addition, the U.S. government revoked a licence that had allowed Iran to sell oil.
Energy markets reacted quickly. International benchmark Brent crude jumped 7% to $79.20 a barrel, marking its highest level in two weeks. Oil had previously fallen from as high as $126 a barrel in late April after the U.S. and Iran reached a deal to end their war in mid-June. That agreement had opened the way for further discussions on sanctions and permitted energy to move through the Strait of Hormuz.
Investors pushed yields higher as they adjusted both for the direct economic impact of higher energy prices and for the increased probability of tighter ECB policy in response to inflationary pressure from rising oil. The combination of geopolitical risk, regained upward pressure on crude and shifting central bank expectations drove the moves on Wednesday.