Rates Spark: Risk sentiment remains fragile amid geopolitical tension

Geopolitics has been lingering in the backdrop over recent days amid negotiations between the US and Iran. And we think they might be part of the reason why Bund yields have not caught up with the latest bearish tendencies seen in US Treasuries. Intraday dynamics also suggest Bunds might be preferred over USTs to hide from Iran-related turmoil.

The latest headlines were that the US would be ready to strike Iran by Saturday, while giving Iran the next 10-15 days to reach a deal. It may explain the reluctance by markets to add risks closing in on the weekend, and rather play it safe in something like Bunds. The anticipated impact on USTs from an escalation in the Middle East could differ from Bunds. The eurozone is more exposed to higher oil and gas prices and would therefore face more of a supply shock with associated negative macro knock-on effects. The US, on the other hand, is more energy independent. Still, if tensions and price impact were to prove more lasting, the Federal Reserve's latest inflation-critical tone out of the FOMC minutes could come into play.

For now, markets are still trying to gauge how much of it is just posturing to strengthen the US negotiation positions. Despite jitters in other markets, we have not seen any material Bund outperformance versus swaps. At least in the past, that would be a clear sign of flight to safety.

Meanwhile, the macro environment still seems to support euro rates settling higher. PMIs point at positive growth, and the German government seems to have started to spend more in the last months of 2025. But we also acknowledge that Europe faces structural economic headwinds too, which means that we shouldn’t take the improving growth outlook for granted. The bias of markets towards more European Central Bank cuts therefore seems justified. Nevertheless, we think 10Y rates should find themselves higher if risk sentiment turns a bit more optimistic again.