Euro zone government bond yields retreated on Wednesday following a run-up to multi-year highs earlier in the week, as investors digested diplomatic signals and cooler UK inflation data.
Germany's 10-year benchmark yield declined 9.4 basis points to 3.09%. That followed a rise to 3.20% on Tuesday, which represented the highest level in 15 years.
Diplomatic developments contributed to the easing in markets. President Donald Trump said on Wednesday that talks with Iran were in their final stages, while warning that further attacks could follow if Tehran did not reach an agreement. In addition, two oil tankers leaving the Strait of Hormuz were taken as a positive sign, helping to reduce immediate concerns about disruptions to shipping.
UK inflation printed below forecasts, offering relief to bond investors. Britain’s 10-year gilt yield slid 14.8 basis points to 4.99% after the cooler inflation reading.
Shorter-term German rates fell as well: the two-year yield, which is sensitive to expectations for near-term central bank moves, decreased 9.8 basis points to 2.65%.
Market expectations for interest rates have shifted since the outbreak of the conflict referenced in these developments. Prior to the war, the European Central Bank was widely expected to keep policy rates unchanged through 2026; market pricing has moved to anticipate at least two 25-basis-point hikes.
Across the Atlantic, the US 10-year Treasury yield stood at 4.57% on Wednesday, after hitting a 16-month high on Tuesday. In Japan, government bond yields also eased following a jump to a 29-year peak on Tuesday; that earlier move came around a successful auction of 20-year Japanese government bonds.
Overall, the combination of diplomatic engagement, the departure of tankers from a key shipping chokepoint, and softer UK inflation data helped to take some upward pressure off government bond yields in Europe and elsewhere on Wednesday.