Global Bond Markets Rally as Oil Prices Slip and ECB Hints at Further Rate Tightening

Markets

Core bonds rallied yesterday, with U.S. Treasuries outperforming German Bunds. Yields fell 5.2 bps on the 2‑year and more than 10 bps on the 30‑year in the United States, while German rates eased between 2.4 and 6 bps across a similar curve shift. End‑of‑quarter buying and a continued decline in oil prices drove most of the move. Brent oil slipped lower on optimism that Strait of Hormuz flows would normalise quickly, closing at $73.74 – the lowest level since the Iran conflict began. Further easing this morning pushed the price of a barrel below pre‑conflict levels.

Retreating inflation risk premia supported the long end of the curve, with modest buying in shorter maturities as well. ECB rate‑hike expectations persist, with markets pricing at least one more move in 2026 to around 2.5 %. ECB board member Claudia Schnabel told Die Zeit that the central bank will probably need to raise rates again, despite welcoming the recent peace deal. She argued that the current 2.25 % policy rate is not yet restrictive and that elevated oil‑price expectations keep forward‑looking inflation pressures alive.

In the United States, money markets increased bets on Fed hikes after solid economic data and a hawkish stance from Fed Governor Christopher Warsh. Even with lower oil prices, about 35 bps of tightening is still priced in for 2026. May PCE inflation data could reinforce this view: consensus expects headline PCE to rise from 3.8 % to 4.1 %, while core PCE is projected at 3.4 % versus 3.3 % in April. Services PCE may remain sticky at 3.7 %, a factor that Fed official Jared Goolsbee highlighted as a sign of underlying inflation resilience.

This backdrop suggests continued pressure on short‑term yields (around 4 % on the 2‑year) and supports a strong U.S. dollar. Technical charts align with the fundamental case: EUR/USD broke below 1.1392, opening the path toward 1.12‑1.11; the DXY is nearing the 102 level, with a target of 102.86; EUR/GBP touched a low just above the 0.86 support before rebounding to 0.862. The market remains uncertain about the length of the GBP’s post‑Burnham rally.

News & Views

May Australian employment data reversed the weak, downward‑revised April figures, adding 40.3 k jobs (up from a loss of 40.7 k). Full‑time employment rose by 5 k and part‑time by 35 k. The unemployment rate fell from 4.5 % to 4.4 %, while the participation rate edged up from 66.6 % to 66.7 %. The head of the Australian Bureau of Statistics noted that the backlog of job seekers awaiting placement has eased. However, sticky core CPI and the latest labour market data have not cleared market doubts about whether the Reserve Bank of Australia will deliver a final rate hike later this year. The market’s implied probability of a November move is now 50 %, down from 60 % at week’s end. AUD/USD is trading around 0.69 after losing the 0.70 support level, with technical support near 0.6833.

Hungarian economic sentiment improved in June, moving from –6.7 to –6.2, its best reading since April 2022. Business confidence held relatively steady (‑8.4 from ‑8.8), while consumer confidence rose from ‑0.9 to ‑0.1, near a seven‑year high. Sector‑by‑sector, industrial confidence slipped slightly, construction remained flat, but retail and services showed notable gains, with services approaching a four‑year high. Employment expectations stayed broadly stable and inflationary pressures eased. The share of firms planning price hikes fell sharply from May, while those anticipating price cuts edged higher. Consumers reported better financial outlooks for both current and future conditions, though optimism about the broader economy and willingness to make large purchases remained unchanged.

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