By Emese Bartha and Miriam Mukuru
Yields on U.S. and European government bonds rose sharply on Wednesday as the U.S.-Israel conflict with Iran showed no signs of de-escalation and oil prices remained elevated.
While President Trump hinted at a potentially quick end to the war, Iran has pledged to continue fighting. Iran laid mines in the Strait of Hormuz and oil prices have started rising again after a brief drop.
High oil prices are increasing concerns about prospects of a spike in inflation that could prevent central banks from cutting interest rates, or potentially prompt rate increases even as economies stutter.
"Rising energy prices linked to the conflict in the Middle East are putting upward pressure on inflation expectations and have triggered a repricing of central bank outlooks," analysts at the Investment Institute by UniCredit said in a note.
Yields on the 10-year German Bund rose 6 basis points to 2.897%, while yields on French, Italian and Belgian bonds increased by up to 10 basis points, Tradeweb data showed. U.K. gilts were also among the major losers, with the 10-year gilt yield 8 basis points higher at 4.641%.
Treasurys were more resilient as the U.S. is a net energy exporter, although their yields were still higher. The 10-year Treasury yield rose 3.3 basis points at 4.167%, according to Tradeweb. Bond yields rise as prices fall.
The increases in yields came as the price of a barrel of Brent crude rose 5.6% to $92.80 a barrel, while WTI crude was up 6.2% at $88.65 a barrel in mid-morning European trade. Both recently climbed above $100 a barrel.
"No signs that the world is able to open the Strait of Hormuz by force as promised," SEB's chief commodities analyst Bjarne Schieldrop said in a note.
European countries have to import oil and are more affected by high energy prices. With the U.K., investors are concerned about the country's fragile fiscal situation.
Oil prices fell on Tuesday and overnight after the International Energy Agency proposed the release of 400 million barrels from strategic reserves, the largest amount ever, while hopes had grown that the conflict could end soon. The decline proved brief, however.
"With very mixed, rambling and often incoherent messages still coming out of Washington, we would suggest that this is still no time for complacency," First Abu Dhabi Bank analysts said in a note.
Eurozone government-bond yields were also lifted by comments from European Central Bank policymaker Peter Kazimir Wednesday, who said a rate increase due to the war in Iran could be closer than thought, Bloomberg reported.
Eurozone money markets priced in one 25 basis-point rate increase by the ECB in September and a small likelihood of a further increase later in the year, LSEG data showed. Prior to the war, markets had the ECB on hold this year.
Markets have also scaled back expectations for the Bank of England cutting interest rates in the coming months.
U.K. money markets priced a small risk of a rate cut through 2026, LSEG data showed. Prior to the start of the war, markets had priced an 83% likelihood of the BOE cutting rates at its next meeting on March 19.
"The volatility in the interest-rate futures market is rarely this high," XTB's Kathleen Brooks said in a note. "But this is what happens when there is a damaging oil price spike".
U.K. inflation last stood at 3.0%, well above the BOE's medium-term target of 2%, and the energy shock could worsen the outlook. It could add between 0.3 and 1.2 percentage points to the U.K. CPI inflation this year, Capital Economics' Ruth Gregory said in a note.
"While investors have not returned to the panic mode seen at the start of the week, with extraordinary swings in the oil price and plunging market values, there is genuine trepidation," Dan Coatsworth, head of markets at AJ Bell, said in a note.
Write to Emese Bartha at emese.bartha@wsj.com and Miriam Mukuru at miriam.mukuru@wsj.com
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March 11, 2026 06:59 ET (10:59 GMT)
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