Fed's rate-hike fears meet Iran peace dividend in global bond split

Investing.com - Eurozone government bond yields snapped a multi-day slide on Thursday, but remained decoupled from a surge in U.S. Treasuries as a hawkish Federal Reserve rate hold clashed with a U.S.-Iran peace deal.

he yield on the benchmark German 10-year Bund - the eurozone’s benchmark - rose to 2.92%. Concurrently, the policy-sensitive two-year note, which moves in lockstep with near-term European Central Bank rate projections, gained to near one-week high of 2.61%.

The market whiplash followed the Fed’s decision to hold interest rates steady while signaling that its tightening cycle is far from over. Swap markets rapidly recalibrated on the news, pushing the implied probability of a December rate hike to 85% - a leap from the 42% chance priced in just before the central bank met.

The move sent U.S. borrowing costs skyrocketing on Wednesday. The yield on the policy-sensitive U.S. two-year note jumped to its highest level in over a year, and was last up at 4.166%, while the benchmark 10-year Treasury yield climbed to 4.43%.

At the same time, Presidents of U.S. and Iran signed an interim peace deal, with both countries releasing the text of the agreement, which pushed oil even longer - a tailwind for the eurzone which heavily dependent on energy imports.

While the prospect of higher-for-longer U.S. rates sent Treasury yields surging, the reaction across the Atlantic exposed a rift in how fixed-income markets view the economic outlook.

This striking divergence highlights an economic decoupling between a hot-running U.S. economy and a more fragile Eurozone recovery.

The slide in oil prices driven by the prospective return of Iranian crude acts as a bifurcated catalyst. It fails to derail the Fed’s aggressive posture, but it provides a welcome disinflationary impulse to the European economy, which recently showed signs of heating up.

At least four officals from the European Central Bank, incuding Chief Economist Philip Lane, are due to speak later in the day, and markets will be glued to any hints on future the bloc’s rate path.

Bank of England expected to hold rates

Yields on Britsh two-year and 10-year continued to however at mid-April lows at 4.188%.

The Bank of England is widely expected to stand pat on interest rates. Instead, the day’s real market catalyst will likely be Governor Andrew Bailey’s forward guidance, with traders parsing every word for clues on the UK’s own terminal rate path.

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