German bond yields returned to flat after an initial surge, as the linkage between oil prices and interest rate hike expectations resurfaces.

⑴ The yield on Germany's two-year government bonds climbed to 2.817% in early Monday trading, the highest level since July 2024, before retracing gains to trade flat at around 2.78%. Previously, the market had fully priced in a European Central Bank rate hike in September.⑵ Money markets indicate that the European Central Bank deposit rate is expected to rise to 2.67% in December and further to 2.75% in February 2027. The current rate is 2.25%, and the market still anticipates a second rate hike within the year.⑶ Oil prices retraced early gains during the session, with Brent crude closing down about 0.15% to $88 per barrel. Iran’s foreign ministry stated negotiations with the US could continue in line with national interest, easing supply disruption fears to some extent.⑷ Analysts point out that the strong correlation between oil prices and short-term eurozone rates has returned. This dynamic dominated the market from March to May this year, and rising geopolitical risks have recently reinforced their association.⑸ A European Central Bank survey shows eurozone companies expect slower price hikes and easing wage growth, indicating that energy-driven inflation pressures have not yet led to a clear second-round effect, providing some buffer for central bank policy.⑹ The yield on Italy’s ten-year government bonds rose about 2 basis points to 3.96%, with the Italy-Germany spread at 80 basis points—significantly wider than the pre-February conflict level of 63 basis points—reflecting additional constraints from geopolitical risks on assets in highly indebted countries.