European government bonds experienced their sharpest rally since 2023 as traders scaled back expectations for interest rate hikes following a Middle East ceasefire. The US-Iran agreement to reopen the Strait of Hormuz triggered a 13% drop in oil prices to $95 per barrel, easing inflation concerns that had fueled aggressive tightening bets.

Markets quickly removed one full quarter-point rate increase from both Bank of England and European Central Bank expectations. Traders now price two quarter-point ECB increases this year with the first by June, down from three hikes previously. For the BoE, markets expect only one hike by September, compared with two priced in just a day earlier.

The shift in rate expectations fueled dramatic bond market moves. Two-year UK gilt yields plunged 0.24 percentage points to 4.17%, with German bund yields dropping equally – their biggest daily moves in over three years. Longer-dated bonds also rallied, sending yields lower across European and US markets.