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Euro yields at two-week low after Iran-Strait deal
10-year Bund yield holds at 2.35% as traders cut ECB rate hike bets by 15 bps. Oil drops 1.8%, euro edges up. Focus shifts to reopening pace.
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Euro zone government bond yields held near two-week lows on Monday after the US and Iran reached an agreement to reopen the Strait of Hormuz. The 10-year German Bund yield, the benchmark for the bloc, steadied around 2.35%. That level is down from 2.48% before the deal leaked late Friday. French and Italian yields tracked the same range.
The deal lowered the risk of a sustained oil price spike, traders said. Energy was the single largest contributor to euro area inflation during the 2022 surge, and supply disruptions from the Iran tension had kept a premium on crude futures. With that tail risk removed, money markets trimmed their expectations for European Central Bank rate increases this year. Markets now price roughly 90 basis points of ECB tightening through December, down from 105 basis points before the deal. The repricing reflects a direct causal chain: reopening the strait reduces the odds of headline inflation reaccelerating.
A prolonged closure of the Strait of Hormuz would have meant crude prices above $100 a barrel for months, hitting corporate margins and consumer spending just as the euro zone economy shows early signs of stabilization. With that worst-case scenario gone, the ECB's path becomes less dependent on external supply shocks and more driven by domestic wage and services inflation.
The relief rippled across other assets. The euro edged up 0.3% against the dollar. Gold slipped as the safe-asset premium declined. The crude futures curve flattened, with front-month Brent falling 1.8% to $86.50 a barrel. European airline and transport stocks, which are most exposed to jet fuel costs, opened higher. Crude oil closed the session near session lows.
Equity markets in Europe opened higher on the news. The broader market read is that the deal removes an energy-driven tail risk that had been keeping rate-hike bets alive through much of January. The next focus is on how fast tanker traffic resumes through the strait and whether any factions on either side attempt to disrupt the terms. Traders are watching for a clean reopening within 48 hours.