Euro zone government bond yields faced volatility as tensions in the Middle East influenced investor sentiment. Following Iran's retaliatory attack on Israel, concerns over a broadening conflict led to fluctuations in bond yields, with the 10-year government bond yield rising after a significant drop on Friday.
Despite Iran ending its attack with minimal impact on Israel and efforts to prevent open warfare between the two countries, uncertainty lingered in the market. Investors remained watchful for retaliatory actions and diplomatic interventions to mitigate escalating tensions, reflecting the unease and caution prevalent in the financial landscape. The gap between U.S. Treasury and German rates reached a multi-year high as markets anticipated a more hawkish approach from the Federal Reserve compared to the European Central Bank, adding to the market's apprehension.
European Central Bank officials hinted at potential monetary policy adjustments even if the Federal Reserve maintained its stance, with projections of multiple rate cuts in the euro area. This led to money markets pricing in considerable ECB rate cuts for the coming years, reflecting the divergent paths expected in U.S. and euro area monetary policies. The fluctuation in bond yields extended to Italy, where the 10-year yield increased, showcasing the broader impact of geopolitical tensions on the euro area's financial landscape.