Italy’s 10-year BTP yield rose toward 3.5%, reaching its highest level since February 3, as investors turned their attention back to inflation risks amid the escalating Middle East conflict. The crisis has intensified, with reports that a US submarine sank an Iranian warship near Sri Lanka while NATO air defenses intercepted an Iranian ballistic missile fired toward Turkey. The spike in energy prices stemming from the conflict is expected to prolong inflationary pressures across Europe, strengthening expectations that the European Central Bank will maintain a more hawkish policy stance. Recent data reinforced those concerns: February figures showed euro area inflation at 1.9% year-on-year, while core inflation came in at 2.4%, both above market expectations. Markets now price in roughly a 40% probability of an ECB rate hike by year-end, reversing last week’s comparable odds for a rate cut, and assign about a 60% chance of a hike by June 2027.
