With shipping activity in the Strait of Hormuz running at robust levels and growing optimism over diplomatic efforts to resolve the US-Iran conflict, German 10-year bond yields are on track for their steepest four-month decline as oil and natural gas prices tumble. Brent crude has slipped below $100 per barrel for the first time since September 9.

French government bonds are outperforming their euro-area peers, with the 10-year yield spread over German bunds tightening 3 basis points to 101 basis points. Italy has mandated banks to arrange a new 12-year green bond issuance.

Traders have scaled back expectations for European Central Bank rate increases by as much as 10 basis points, now pricing in a 12.5 basis point hike in October, 35 basis points by year-end, and 81 basis points by the end of 2027.

UK gilts are also advancing on the back of lower energy prices, with money markets currently pricing a 20 basis point hike by the Bank of England in November and 37 basis points by the close of the year.

Market snapshot: German 10-year yields are down 7 basis points at 3.45%, while bund futures have climbed 78 ticks to 121.10. Italian 10-year yields have fallen 11 basis points to 4.33%, French 10-year yields are 11 basis points lower at 4.46%, and 10-year UK gilt yields have dropped 9 basis points to 5.21%.