By Emese Bartha
Government-bond yields rose early on Thursday before tentatively stabilizing as elevated oil prices and no signs of de-escalation in the Middle East war worsened the outlook for both inflation and economic growth.
The 10-year German Bund yield rose to its highest in nearly two and a half years at 2.963% in opening trade in Europe while the 10-year U.S. Treasury yield hit a five-week high of 4.251% in Asian trade, according to Tradeweb.
Trade has since calmed but bonds are expected to remain volatile and vulnerable to further selling, which could propel yields higher again.
"Escalating tensions in the Middle East and supply disruptions continue to propel energy prices upward, raising fears of inflationary pressures and keeping yields supported," said Abdelaziz Albogdady, market research and fintech strategy manager at FXEM, in a note.
The price of Brent crude oil rose back above $100 a barrel in Asian trade as concerns grew that disruption to energy markets could be prolonged. Efforts by the U.S. and the International Energy Agency to unleash the largest distribution of oil reserves in history provided limited relief to markets.
"From a market perspective, the problem is that investors are increasingly pricing in a more protracted conflict that causes extensive economic damage," Deutsche Bank analysts said in a note.
"With no concrete signs of de-escalation yet, that's keeping oil prices elevated, and raising the risk of a broader stagflationary shock," they said. Stagflation is when inflation is persistently high while the economy is weak.
Eurozone bond yields also risk rising due to the prospect that high energy prices could prompt the European Central Bank to raise interest rates. In the U.S., it makes near-term Federal Reserve interest-rate cuts look less likely.
Oil prices at around $150 a barrel is where demand destruction begins to outweigh inflation fears for central banks, said James Rossiter, head of global macro strategy at TD Securities, in a note.
"Policymakers are now likely to put relatively more weight on inflation and inflation expectations than growth in their loss functions," he said.
The worsening outlook has prompted Goldman Sachs analysts to change their growth, inflation and central bank forecasts across Europe.
Goldman Sachs now forecasts eurozone headline annual inflation to peak at 2.9% in the second quarter of 2026, versus 2.0% before the war. Under a "very adverse" scenario--involving a 60-day disruption of energy flow through the Strait of Hormuz where oil prices reach $150 a barrel and decline only slowly--inflation could rise to 4.4%.
For now, Goldman Sachs maintained its forecasts for unchanged policy by the European Central Bank. Under its very adverse scenario, however, it expects the central bank could deliver three sequential 25 basis-point rate hikes from June.
Analysts at KBC Bank said a eurozone rate hike could come sooner than markets are anticipating if the Middle East war continues to escalate, potentially in April or even as soon as next week.
Bond markets are largely driven by events in the Middle East but investors should keep an eye on French municipal elections beginning on Sunday, Citi rates strategists said in a note.
"These elections are widely seen as marking the beginning of the 2027 presidential campaign," they said. Currently, the far-right National Rally's Jordan Bardella is the favorite to win in 2027.
"There appears to be little political risk premium in OATs [French government bonds] into the elections," they said.
The 10-year U.S. Treasury yield last traded 1.8 basis points higher at 4.222%. The 10-year German Bund yield was 0.5 basis points lower at 2.926%.
Write to Emese Bartha at emese.bartha@wsj.com
(END) Dow Jones Newswires
March 12, 2026 06:55 ET (10:55 GMT)
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