Euro zone government bond yields steadied on Tuesday after touching a more than two-week low the day before, following a preliminary agreement between the U.S. and Iran to end their war and reopen the Strait of Hormuz.
The agreement to reopen the vital waterway, which saw one-fifth of the world's oil and gas flow through it before the war, should ease pressure on energy supplies, which pushed front-month Brent crude futures to their lowest level since March 10.
Lower energy prices have dampened worries about higher inflation and slowing growth, and helped reduce expectations for further policy tightening from major central banks, including the European Central Bank.
Germany's 10-year Bund yield, the benchmark for the euro zone, was little changed at 2.954%. It fell 5 bps on Monday to 2.9443%, its lowest since May 29.
Germany's two-year yield, which is sensitive to changes in ECB rate expectations, was up 0.5 bps at 2.577% after falling to a two-week low of 2.547% on Monday.
ECB HIKE EXPECTATIONS TRIMMED Last week, the ECB was the first major central bank to tighten policy since the outbreak of the war, followed by a Bank of Japan rate hike earlier on Tuesday.
Investors, however, have trimmed their expectations for further hikes from the ECB following the peace agreement, even if details of the deal are light. Money market futures are fully pricing in 32 bps of tightening by the end of the year, implying one quarter-point hike and around a 30% chance of another.
"Our view remains that a deal implies that ... the ECB should be done with its rate hiking cycle," Jefferies economist Mohit Kumar said. ECB President Christine Lagarde on Monday welcomed news of the peace agreement, but other policymakers, including Germany's Joachim Nagel, said there would be no immediate relief on inflation because it would take months to restore oil supply to its pre-war level.
ECB chief economist Philip Lane is scheduled to participate in a Reuters NEXT event later on Tuesday, which could provide further clues on the outlook for monetary policy.
