On Thursday, eurozone government bond yields declined as traders further reduced bets on imminent interest rate hikes by the European Central Bank, amid growing market optimism that the Middle East conflict may be nearing an end. However, unlike global stock markets, bond prices remain significantly lower than pre-war levels, meaning yields are still much higher.

The yield on Germany's 10-year government bond, which serves as the benchmark for the eurozone, fell by 3 basis points to 3.02%, moving further away from the peak of 3.13% seen in late March.

Nevertheless, this yield remains well above the pre-war level of approximately 2.7% and is closer to recent highs. Traders anticipate that the surge in energy prices triggered by the conflict and its potential to drive up overall inflation will still compel the ECB to raise interest rates.

Current market pricing indicates expectations for two ECB rate hikes this year, each of 25 basis points, down from the three hikes anticipated a few weeks ago. Before the conflict, traders had projected a possibility of ECB rate cuts by 2026.

Optimism in the bond market, at least compared to late March, has been supported by news that a key Pakistani mediator has arrived in Tehran, alongside optimism from the Trump administration regarding a potential agreement to open the critical Strait of Hormuz.

A senior Israeli official also reported that the Israeli cabinet held a meeting on Wednesday to discuss the potential for a ceasefire with neighboring Lebanon.

Italian government bonds, which have recently underperformed the German benchmark, showed stronger performance this time. The yield on 10-year Italian government bonds fell by 5 basis points to 3.77%.