By Emese Bartha

Government bond yields in the U.S. and Europe rose on Thursday as doubts about a near-term resolution to the Middle East war reignited concerns about inflation and prospects of interest-rate hikes.

U.S. President Trump has said that he wants to wrap up the conflict with Iran soon. However, Iran said on Wednesday evening that it has no intention of negotiating with Washington. Investors have become wary again and the optimism on markets evident earlier in the week has dissipated.

The 10-year U.S. Treasury yield rose 4.8 basis points to 4.375%; the 10-year German Bund yield increased 6.8 basis points to 3.022%; and the 10-year U.K. gilt yield rose 8.5 basis points to 4.915%, according to Tradeweb.

"Any setback to the current cautious optimism could push yields back to, or even beyond, their recent highs, as markets remain focused on near-term inflation risks rather than the longer-term growth implications," said Jussi Hiljanen, chief rates strategist at SEB.

With no solution to the reopening of the Strait of Hormuz, oil supply remains disrupted, keeping prices elevated. Brent crude oil last traded at $106.02, up 3.7% on the day.

"Investors have eagerly awaited a ceasefire in the Middle East this week but once again there are mixed messages from the U.S. and Iran, leaving markets confused," AJ Bell's head of markets Dan Coatsworth said in a note.

Energy scarcity pushes inflation higher, raising the prospect that central banks could raise interest rates even as higher energy prices also pose risks to economic growth.

As risks of persistently elevated energy prices have increased, the European Central Bank might still need to hike rates even if the conflict were resolved within a few weeks, Hiljanen said.

Markets now price around 75 basis points of European Central Bank rate hikes by the end of 2026, LSEG data showed, having anticipated unchanged rates through 2026 prior to the Middle East war.

"Markets are appreciating U.S. efforts to seek a deal, but without concrete steps, the overarching narrative of two to three ECB rate hikes this year remains unchanged," said Michiel Tukker and Benjamin Schroeder, senior rates strategists at ING in a note.

Investors now expect the U.S. Federal Reserve to keep the fed funds target range rate unchanged at 3.50%-3.75% in 2026, according to LSEG. For the Bank of England, investors on Thursday priced an 81% chance of a rate increase next month, up from around 65% on Wednesday.

If yields continue to rise, they would risk a return to Monday's multiyear highs for 10-year German Bunds and U.K. gilts of 3.077% and 5.118%, respectively; and the multimonth high for the 10-year Treasury yield of 4.445%.

Yields on bonds of more indebted eurozone countries, such as Italy, France and Belgium, also rose by more than those of German Bund yields on Thursday, causing spreads to widen.

"One thing the conflict clearly demonstrates is the global economy's heavy reliance on energy," said Johannes Mayr, chief economist at Eyb & Wallwitz.

This reality continues to hit Europe particularly hard, as Europe remains import-dependent, despite its shift away from Russian energy starting in 2022, the economist said.

Write to Emese Bartha at emese.bartha@wsj.com

(END) Dow Jones Newswires

March 26, 2026 07:03 ET (11:03 GMT)

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