Government bond yields across the euro area fell on Friday after U.S. air strikes killed a top Iranian commander, heightening geopolitical tensions. Germany’s 10-year safe-haven Bund yields slid to two-week lows, Spanish yields hit five-week lows and borrowing costs in Italy tumbled almost 10 basis points.
The overnight attack, authorised by U.S. President Donald Trump, marked a dramatic escalation in a shadow war between Iran and the United States and its allies, principally Israel and Saudi Arabia. Iran on Friday threatened to hit back hard. Unease rippled across world markets, with oil prices soaring almost $3 and safe-haven assets such as the Swiss franc, Japanese yen and U.S. Treasuries rallying.
“Markets still remain quite thin after the holidays, but even in a regular session we would have seen a similar reaction,” said Christian Lenk, a rates strategist at DZ Bank in Frankfurt. “The repercussions from the air strike are not clearly forecastable and tensions remain high in the region.” Yields on German bonds, regarded as one of the safest assets in the world, were sharply lower across the curve. The 10-year Bund yield fell 7 basis points to a two-week low of -0.29%, 13 bps below seven-month highs hit just a day ago.
Across the euro zone, 10-year bond yields fell 6-9 bps . U.S. 10-year Treasury yields hit their lowest in three weeks at around 1.81%. The focus on geopolitics meant markets paid little attention to stronger-than-expected data from France, where inflation rose 1.6% year-on-year in December, beating analyst expectations for a 1.4% rise.
State inflation data from Germany, the euro zone’s biggest economy, also had a muted impact. Signs that economic indicators are bottoming out and U.S./China trade tensions are easing have boosted hopes for growth and inflation in the euro zone — pushing euro zone yields to multi-month highs just on Thursday.
“Even if you take geopolitics out, most of the positive news is there (in the price),” said Salman Ahmed, chief investment strategist at Lombard Odier. “But for me there is a natural boundary in how much interest rates can move higher — we are not expecting a major ramp up in growth or inflation, inflation is way below target.”
Spain’s 10-year bond yield fell 7 bps to 0.38% following news that a Catalan separatist party plans to abstain during parliament’s upcoming vote to confirm Socialist leader Pedro Sanchez as prime minister. The move could end a prolonged political deadlock that left Spain without a proper government for most of 2019.