Eurozone government bonds rallied in a bumpy session on Monday after US President Donald Trump said he would order the US military to postpone any strikes against Iranian power plants and energy infrastructure for five days.
Trump said he has had "good and productive conversations" with Iran.
Meanwhile, Iran's Tasnim news agency, citing an Iranian official, said that the Strait of Hormuz would not return to pre-war conditions and energy markets would remain unsettled, adding that no negotiations with the US were underway.
Bonds had been selling off for the fourth consecutive session earlier in the day, but then sharply reversed course following Trump's comments. Over the weekend, Trump had threatened to destroy Iranian power plants if Tehran failed to "fully open" the Strait of Hormuz to all shipping within 48 hours.
"What's done is still not undone, so the impact has yet to be seen. But obviously markets are breathing a sigh of relief on this news," Chris Beauchamp, chief market analyst at IG Markets, said.
Germany's 10-year government bond yield, the euro area's benchmark, was last down around 5 bps at 2.9873%, after hitting 3.077% early in the session, its highest since June 2011.
The spread between German and Italian 10-year bond yields on Monday had widened as far as 103.62 bps for the first time since June 2025, but was last back down to around 86 bps.
"I think we are literally trading off of headlines now," Andrzej Szczepaniak, senior European economist at Nomura, said, noting that most economic data being published was already stale.
"From a market perspective, it's really just monitoring the news headlines that we're getting over the course of today and this week, seeing how those impact oil and gas headlines and obviously from that perspective, yields."
Shifting rate expectations
Global bonds have been under pressure as the conflict in the Middle East has stoked inflation fears, with central banks around the world raising the alarm about the risk of higher prices last week. Concerns about accelerating inflation have also upended central bank policy expectations.
Those shifted again on Monday after Trump's remarks, with investors scaling back their bets on future European Central Bank rate hikes.
Money market pricing last indicated an around 61% probability of an ECB rate hike at its next meeting in April, down from close to 90% earlier in the day. Markets were last pricing in at least two rate increases from the ECB this year, compared with at least three previously.
This is, however, still a sharp contrast from the end of February, when the ECB was broadly expected to keep rates steady this year.
ECB policymaker Peter Kazimir on Monday said the central bank would not hesitate to tighten policy if the upcoming energy-driven inflation surge appears likely to become entrenched.
Shorter-dated bond yields, which are more sensitive to policy expectations, also broadly turned lower, with German 2-year yields last down close to 10 bps to 2.5716%. They had risen as high as 2.764% earlier in the day.
Italian 2-year yields were 7.8 bps lower at 2.8813%, down from a previous high of 3.151%.
GBP, USD, Wall Street updates
The pound also climbed on Monday after Trump's comments. Sterling was last up 0.59% against the dollar at $1.342, after earlier falling more than 0.5% as investors flocked to the dollar.
Trump's postponement sparked a rebound in stock markets, which had been trading deeply in the red, and also alleviated some of the pain in Britain's fragile bond markets.
Ten-year Gilt yields were last down 7 basis points to 4.928%, having earlier risen to their highest level since 2008 as markets priced in four 25-basis-point interest rate hikes from the Bank of England this year. Yields rise as prices fall and vice versa.
Traders were last betting on around 60 basis points of rate hikes from the BoE in 2026, still a dramatic change from the two cuts priced in before the war, but down sharply from earlier in the day.
The euro was down 0.3% against the pound at 86.48 pence. That in part reflected the fact that traders still think the BoE will hike rates more than the European Central Bank this year, boosting the relative appeal of the pound.
British Prime Minister Keir Starmer has called for an emergency meeting with senior ministers and BoE Governor Andrew Bailey later on Monday to discuss the response to the energy shock stemming from the war.
In the US, Wall Street's main indexes opened higher on Monday as risk appetite returned to markets after Trump's statements.
The Dow Jones Industrial Average rose 226.3 points, or 0.50%, at the open to 45,803.82. The S&P rose 68.5 points, or 1.05%, at the open to 6,574.96, while the Nasdaq Composite rose 348.2 points, or 1.61%, to 21,995.78 at the opening bell.
Meanwhile, the US dollar dropped by 0.7% against the euro and 0.6% against the yen immediately after Trump's comments and was last trading down 0.53% against the EUR=EBS at $1.163.
The buck was 0.6% weaker at 158.27 yen, retreating slightly from the key 160 yen level that puts traders on alert for potential intervention by the Bank of Japan.
That left the dollar index, which measures the US currency against a basket of peers, down 0.6% at 98.94.
On Friday, the index had notched its first weekly decline since the start of the war, as the inflationary effects of surging oil prices prompted central banks to turn hawkish, supporting other currencies.