Euro zone government bond yields were on track for their first weekly increase since mid-May on Friday as investors became more cautious about the prospects of a quick U.S.-Iran agreement that could reopen the Strait of Hormuz and ease global energy market tensions.

Market sentiment shifted after reports that the Iran-backed Hezbollah militia rejected a new ceasefire proposal in Lebanon, complicating efforts by U.S. President Donald Trump to secure a broader regional peace deal and reduce disruptions to energy supplies.

The Strait of Hormuz remains a critical concern for financial markets because it serves as a major route for global oil and gas shipments. A reopening of the waterway could help lower energy prices, reduce inflationary pressures, and lessen the need for further interest rate hikes by central banks.

Germany’s two-year government bond yield, which is particularly sensitive to monetary policy expectations, held near 2.66% and was set for a weekly increase of about 12.5 basis points. Meanwhile, Germany’s benchmark 10-year bond yield edged higher to around 3.02%, putting it on track for a weekly gain of roughly 10 basis points.

Investors increasingly expect the European Central Bank to continue tightening monetary policy. Money markets are pricing in a deposit rate of approximately 2.65% by the end of the year, implying at least two additional quarter-point rate hikes and a strong possibility of a third increase.

Markets currently see a high probability that the ECB will raise interest rates at its upcoming June policy meeting, with another move potentially following in September.

Attention is also focused on the U.S. labor market report, which could provide fresh clues about the Federal Reserve’s policy direction. Economists expect the U.S. economy to have added around 88,000 jobs in May while the unemployment rate is forecast to remain steady at 4.3%.

A resilient labor market could reinforce the Fed’s focus on inflation and further delay any discussion of rate cuts. In fact, traders have largely ruled out a U.S. rate cut this year and are increasingly considering the possibility of a rate hike later in 2026.

Elsewhere, Italy’s 10-year government bond yield remained near 3.78%, while the spread between Italian and German bonds stayed relatively stable.

With inflation concerns remaining elevated and geopolitical risks continuing to affect energy markets, investors are looking to next week’s ECB meeting for guidance on how aggressively policymakers intend to respond to the evolving economic landscape.