Bonds: “Oil prices are the dominant driver”

All eyes are on the Middle East, including in the bond market. That’s because developments there will determine how oil and gas prices evolve—and, consequently, inflation and interest rates. Interest rate cuts in the U.S. appear to be off the table.

May 8, 2026. FRANKFURT (Deutsche Börse). Bond markets continue to fluctuate in response to news from Iran. Yields had fallen at times, and it looked as though an agreement in the Iran conflict was imminent. However, yields rose again in light of renewed fighting. “Global market prices for crude oil and natural gas remain the dominant driver of the bond markets for the time being,” says DekaBank Chief Economist Ulrich Kater, describing the situation. “The market is swinging back and forth, driven by the latest reports,” reports bond trader Rainer Petz of Oddo BHF.

The correlation between oil prices and yields has been quite tight since the start of the Iran conflict, as Commerzbank analyst Hauke Siemßen explains. However, there have been no major swings in yields on German government bonds for several weeks. Petz speaks of a “narrow range” within which yields have been moving. Ten-year German government bonds were yielding 3.0 percent on Friday afternoon, down from 3.03 percent a week ago. Two-year German government bonds are yielding 2.58 percent, the same as last Friday. 

ECB: Interest Rate Hike on the Horizon

Future developments in key interest rates are also heavily influenced by events in the Middle East and the price of oil. Yesterday, Thursday, Norway’s Norges Bank became the first central bank in Western Europe to raise interest rates since the outbreak of the Iran war. The ECB left key interest rates unchanged last week. However, it is expected to raise rates over the course of the year.

In the U.S., the previously anticipated interest rate cuts have become less likely. Incidentally, Jerome Powell’s term as Federal Reserve Chair ends next week, and Kevin Warsh will succeed him. “Donald Trump is pinning his hopes on the Fed now quickly delivering the interest rate cuts he has repeatedly demanded,” notes Bernd Weidensteiner of Commerzbank. However, he says this is doubtful. “After all, inflation risks have moved to the top of the agenda.” In this environment, the majority of the Fed will not be so easily persuaded to cut key interest rates.