Euro zone bond yields drop after US and Iran pause strikes

July 27 (Reuters) - Government bond yields across the euro zone fell on Monday as easing oil prices helped to calm short-term inflation fears after U.S. President Donald Trump's decision to suspend attacks on Iran and leave room for diplomacy.

Oil prices tumbled more than 5% after the U.S. and Iran halted strikes, raising hopes of a diplomatic solution that would allow shipping to resume in the Strait of Hormuz.

Germany’s 2-year yields <DE2YT=RR>, more sensitive to expectations for policy rates, fell 2.5 basis points (bps) to 2.79%, having reached 2.8938% last week for the highest level since July 2024.

Money markets slightly scaled back bets on the European Central Bank deposit rate to 2.67% for December EURESTECBM3X4=ICAP and 2.72% for February 2027, up from the current 2.25%. They fully priced a depo rate at 2.75% last week.

The ECB still considers the current inflation shock to be medium-sized, which requires some policy action but not aggressive moves. It expects price growth to return to 2% in the next year or so, ECB chief economist Philip Lane said.

The central bank kept interest rates unchanged as expected on Thursday but held the door open for another increase in September.

Germany’s 10-year government bond yield <DE10YT=RR>, the euro area’s benchmark, was down 3 bps at 3.14%. It reached 3.2118% last week for its highest since May 2011.

Italy’s 10-year government bond yields <IT10YT=RR> fell 5 bps to 3.95%.

The spread between Italian government bonds and Bunds <DE10IT10=RR> was at 79 bps. It was at 63 bps in February before the attack on Iran and hit 103.62 in late March, the highest since June 2025.

(reporting by Stefano Rebaudo
Editing by David Goodman)

((stefano.rebaudo@tr.com))