Falling Oil Boosts Risk, Eurozone Bond Yields Drop

Italian bonds experienced a sharper decline in yields, having been harder hit since the Iran war outbreak, with yields gaining nearly 60 bps compared to Germany's 32 bps rise, due to Italy's higher dependence on fossil fuel imports. Kenneth Broux, head of corporate research FX and rates at Societe Generale, attributed the moves to general risk appetite, noting that higher beta assets like Italian and Greek bonds outperformed.

He cautioned that these gains are short-lived if peace talks fail. Oil prices softened, Brent crude futures dropping 5% to $95 a barrel, while the European benchmark STOXX 600 rallied 1.3%.

Traders also processed German business morale data, which fell less than expected in March. The German 2-year Schatz yield, sensitive to interest rate expectations, fell 5.4 bps to 2.88%.

European Central Bank President Christine Lagarde indicated on Monday that even a "not-too-persistent" inflation overshoot from the energy shock warrants moderate policy tightening. Market watchers now assign a 63% chance of a 25 bps ECB rate hike at the next meeting, a reversal from pre-war expectations of a rate cut.