Eurozone government bond yields held steady at high levels on Wednesday, as a sharp escalation in the Middle East reignited inflation fears, completely overshadowing cooler inflation data.
Fixed-income markets came under sharp selling pressure following US President Donald Trump's overnight escalation of geopolitical tensions.
Trump announced the reimposition of a strict US naval blockade on Iranian ports and issued an ultimatum that unless Tehran returns to the negotiating table to resolve the dispute, the United States will launch targeted strikes against Iranian civilian infrastructure, including power plants and bridges, possibly as early as next week.
The renewed blockade and threats to internal infrastructure directly jeopardize the stability of the Strait of Hormuz region—the world's most critical oil chokepoint. Energy markets have already priced in the risk of retaliatory shipping disruptions from Tehran.
Trump backed down from a controversial proposal to impose a uniform 20% transit fee on all non-Iranian goods passing through the Strait.
While the cancellation of this shipping tax helped avert a full-blown panic in the maritime logistics sector, the looming threat of open conflict kept oil prices well supported, fueling fears of a second wave of inflation caused by supply-side disruptions.
With investors preparing for a longer-term high interest rate environment to weather potential commodity shocks, sovereign debt has been dumped across the Eurozone, pushing yields higher.
The yield on two-year German bonds, which moves in tandem with the European Central Bank's interest rate expectations, remained close to its two-year high of 2.75%.
Meanwhile, the yield on Germany’s 10-year bonds, the main benchmark for the Eurozone, remained firmly at its highest level in weeks at 3.099%.
