European bonds rallied sharply on Thursday as oil prices fell on fresh optimism about a Middle‑East peace deal. Short‑dated sovereigns led the move, with the UK two-year yields dropping 14 basis points to 4.20%, a two‑week low, while German peers slipped nearly 10 basis points to 2.58%.

The rally reflected President Donald Trump’s sudden shift, saying a deal with Iran was near after earlier threatening strikes on Tehran’s oil infrastructure. Traders interpreted the softer rhetoric as reducing geopolitical risk, prompting a pull‑back on bets that the European Central Bank would raise rates further this year. Money markets also trimmed expectations for a Bank of England hike.

Mizuho multi‑asset strategist Evelyne Gomez‑Liechti said the free‑fall in oil is driving the bond rally and that markets are pricing in optimism on a resolution. With the ECB’s recent 25‑basis‑point deposit‑rate hike already baked in, the bond surge underscores how quickly political cues can reshape rate‑risk premia across Europe.

Investors now face a narrower window for rate‑sensitive strategies as the yield curve flattens. The decline in short‑term European yields could pressure banks’ net‑interest margins, while the lower cost of borrowing may spur corporate refinancing activity. Asset managers may shift to longer bonds, while currency traders eye the euro.