The renewed conflict between the U.S. and Iran has boosted oil prices and inflation expectations, causing German government bonds to fall in response.

As conflicts in the Middle East escalate, pushing oil prices and inflation expectations higher, the yield on Germany's benchmark 10-year government bond rose by 4 basis points to 3.03%, surpassing 3% for the first time in almost a month. The two-year government bond yield, which is more sensitive to changes in monetary policy, rose by 6 basis points to 2.65%. France's 10-year government bond experienced more severe selling, lagging behind Germany and Italy's bonds by up to 2 basis points, reflecting increased market uncertainty in France's political future after far-right leader Marine Le Pen announced her participation in the upcoming presidential elections next year. On July 7, the US Central Command declared in a statement and video that the US military had conducted a new round of offensive strikes against Iran, hitting "more than 80 targets with precision-guided munitions" in direct response to recent attacks by Iran on commercial ships sailing in the Strait of Hormuz. The statement mentioned that the US military targeted Iran's air defense systems, command and control networks, coastal radar sites, and anti-ship missile capabilities. Additionally, they destroyed over 60 small Iranian Islamic Revolutionary Guard Corps vessels in the Strait of Hormuz and surrounding waters. The US military stated that Iran had previously attacked three commercial ships passing through the Strait of Hormuz: the Marshal Islands-flagged "Altarique," the Saudi Arabian-flagged "Wadiyan," and the Liberian-flagged "Seforos Prosperity." The US Central Command forces maintained readiness, stating that they would hold Iran accountable if they did not comply with agreements. On July 8, the Iranian Islamic Revolutionary Guard Corps issued a statement accusing the US military of conducting airstrikes in violation of ceasefire agreements and the Islamic Memorandum of Understanding in coastal areas of Hormozgan and Mahshahr. The Revolutionary Guard claimed to have hit 85 US military targets in Bahrain and Kuwait in response to the violations. Iran's top military adviser, Rezaei, stated that the US was prepared to launch attacks again, but Iran was fully prepared to respond. The armed forces of Iran's Hataam Anbia Headquarters also stated that they would strongly respond to US attacks and reiterated that they would not allow any US interference in the management of the Strait of Hormuz. Furthermore, on July 8, US President Trump declared at the NATO summit that he believed the US-Iranian Memorandum of Understanding had been "terminated." Due to the renewed mutual attacks between the US and Iran, as of the time of writing, Brent crude oil futures surged by nearly 6% to $78.43 per barrel. The rising oil prices have led to renewed concerns in the market that inflation may persist higher than expected for a longer period. The currency market currently anticipates an 80% probability that the European Central Bank will raise interest rates by 25 basis points again in September, following the rate hike in June. The market has fully priced in the expectation of another rate hike by the end of the year and is leaning towards the ECB implementing another rate hike before mid-next year. Isabel Schnabel, a member of the ECB's executive board, stated earlier this week that supply chain pressures remain high. Other policymakers also believe that price pressures are still evident and may further push up wages, food, and service costs in the coming months. Camille de Cussele, Director of European Developed Market Rates Strategy and Economic Research at BNP Paribas, stated, "This perfectly illustrates why central banks worldwide must continue to exercise caution." She added that the market's expectations for another rate hike by the ECB this year are "quite strong," as there may be more evidence of second-round effects of inflation by the September policy meeting, prompting the ECB to take action.