Euro zone yields fall on Middle East hopes, two 2026 ECB hikes priced

By Stefano Rebaudo

May 25 (Reuters) - Euro zone government bond yields fell on Monday as renewed hopes of a U.S.-Iran deal to reopen the Strait of Hormuz eased concerns over inflation and reduced expectations of aggressive central bank rate rises. Borrowing costs tracked moves in oil prices, which slid 5% to a two-week low as hopes for a peace deal lifted sentiment, even as key sticking points remained unresolved. The United States will either have a good agreement with Iran, or deal with the country "another way," Secretary of State Marco Rubio said on Monday.

Money markets priced in a European Central Bank depo rate at 2.57% in December from 2.65% late Friday, from the current 2%. They indicated an 70% chance of a first rise next month from 80%. Germany's 2-year yields, which are more sensitive to expectations for policy rates, fell 6.5 basis points (bps) to 2.5758%, their lowest level since May 8. They reached 2.771% in late March, the highest since July 2024. (Reporting by Stefano Rebaudo; editing by Amanda Cooper)