German bond yields surge to over two-year high! Middle East conflict reignites inflation "nightmare", European Central Bank rate hike expectations soar.

Notice that, German government bond prices have dropped for the second consecutive day, as the market worries that the Iran war will further push up inflation, pushing up government borrowing costs to their highest level since October 2023. The yield on the German 10-year government bond rose 3 basis points to 2.96%. Traders have increased their bets on a rate hike by the European Central Bank, with a 35% implied probability of a 25 basis point rate hike in April, and nearly fully pricing in expectations for a hike in June. The market currently expects two rate hikes by the end of 2026. European Central Bank Governing Council member Peter Kazimir stated this week that the inflationary effects of the war may force the ECB to raise borrowing costs sooner than expected. President Lagarde agreed with this statement, claiming that necessary measures will be taken to control inflation and prevent a repeat of the inflation surge that occurred in the early 2010s. Macro strategist Ven Ram stated, "Due to the impact of the fall in US bond yields and the repricing of inflation risk premiums in the eurozone, German long-term government bonds will continue to be under pressure in the short term. The simultaneous movement of German and US bond yields once again confirms their traditionally strong correlation." Hauke Sim, interest rate strategist at a German commercial bank, said, "We believe that the European Central Bank will not hike rates this year. However, due to hawkish rhetoric suppressing inflation expectations, the market currently seems to be pricing in a downside scenario." He is currently maintaining a wait-and-see stance on holding German government bonds. The Iran war has entered its second week with no signs of easing. After Oman cleared key export terminals outside the Strait of Hormuz and two oil tankers were attacked in Iraqi waters, Brent crude oil prices jumped back above $100 per barrel on Thursday. Europe is particularly vulnerable to the consequences of the conflict as it relies on energy imports for heating homes and powering factories. Natural gas futures have risen by over 60% this month.