Euro zone government bond yields fell from close to multi-year highs on Tuesday as oil prices declined, with traders viewing the latest U.S. sanctions against Iran as preferable to further military escalation.
Germany's 10-year bond yield, the benchmark for the bloc, fell 3 basis points (bps) to 3.222%, down from the 15-year high of 3.275% touched last week. Yields move inversely to prices. Yields, particularly those on longer-dated bonds, hit their highest in at least a decade around the world last week as investors worried about inflation stemming from the U.S.-Israeli war with Iran and high levels of government spending.
The German 30-year yield fell 2 bps on Tuesday to 3.728%, after touching a 15-year high last week of 3.787%.
Oil prices fell as markets assessed the sanctions that the U.S. said would cut Iran's economic lifeline.
Tehran promised to retaliate and expressed confidence that major trading partners would resist Washington's pressure campaign.
"The sanctions were not immediate and serve more as a threat to Iran rather than immediate action," said Mohit Kumar, chief European economist at Jefferies. "(Treasury Secretary Scott) Bessent also kept the negotiation route open."
Brent crude oil fell 3% to $89.40 a barrel, down from a one-month high of $94.80 a barrel on Friday. Traders have increased their bets on European Central Bank rate hikes in recent weeks as the U.S.-Iran conflict has again pushed up energy prices, although they trimmed them slightly on Tuesday as oil prices fell.
Money markets were pointing to 43 bps of further ECB tightening this year, down slightly from Monday but up from the 41 bps priced in at the start of last week.
Resilient economic growth has also pushed up bond yields and rate hike bets, analysts say. Data on Tuesday showed the German economy grew by 0.3% in the second quarter, above the preliminary reading of 0.2%, while business morale hit its highest level in a year in August.
French 30-year bond yields fell 4 bps to 4.862% on Tuesday, down from the 18-year high of 4.923% touched on Monday.
