Euro and US bond yields log biggest monthly rise since March
Sovereign bond yields across the US and euro zone posted their steepest monthly gains since March as geopolitical tensions forced investors to drastically scale back expectations for interest rate cuts.
Government bond yields in the world's largest economies surged through July, logging their most significant monthly increase since March. The sharp rise came as traders abandoned hopes for near-term monetary easing, driven by renewed fears that escalating Middle East conflicts will fuel global inflation. Yields dipped slightly on Friday as oil prices eased on improved maritime energy supplies, offering a brief reprieve despite limited progress in diplomatic talks between the United States and Iran.
The daily declines did little to reverse the broader monthly selloff, which represents a dramatic repricing of central bank policy trajectories on both sides of the Atlantic. Market participants now anticipate the European Central Bank's deposit rate will climb to 2.75% by early 2027, a level reminiscent of previous peaks tied to Iran-related tensions. This marks a stark shift from earlier expectations, especially after the ECB raised its key rate to 2.25% in June and held steady this month.
The Federal Reserve is facing a similar reassessment from market professionals. Investors have aggressively reduced bets on US rate cuts, shifting to price in two separate hikes by June of next year. The market is currently assigning a near-certainty to a rate increase as early as October, indicating that traders increasingly view geopolitical supply shocks as a persistent threat to price stability rather than a temporary disruption.
The shift in sentiment is clearly visible in benchmark sovereign debt pricing. Germany's two-year yield, which is highly sensitive to rate expectations, fell 0.5 basis points on Friday to 2.76%, yet remained up 22 basis points for the month. The German 10-year benchmark dropped 1.5 basis points on the day to 3.15%, finishing July up 28 basis points. Across the Atlantic, the US 10-year Treasury yield eased 1.5 basis points on Friday to 4.65%, still posting a monthly gain of 22.5 basis points.
In Asia, the Bank of Japan kept interest rates unchanged, though it signaled that further policy tightening remains a possibility. Japanese government bond yields were largely unmoved by the global volatility, with the benchmark 10-year yield holding flat at 2.79%.
