On Thursday, the ECB, Europe's central bank, raised rates to fight inflation. By Friday, the bond market was betting those hikes are nearly done. The reason for the flip? Oil.
A bond yield is just the interest rate a bond pays. Across Europe, those yields fell on Friday.
Bond prices and yields move in opposite ways. When prices climb, yields slip.
UK 2-year yields dropped 14 basis points to 4.20%, a two-week low. German 2-year yields fell nearly 10 points to 2.58%.
A basis point is one-hundredth of a percent. So these were real, fast moves in a single day.
Falling yields mean rising bond prices. It was a strong day for anyone holding them.
The gains were led by shorter-term bonds. They track rate bets the way a thermometer tracks the room - they move first and fastest.
Why the front end? Short bonds care most about the next few rate moves. When hike bets fade, they rally hardest.
The trigger was simple. Lower oil means less inflation pressure. Less pressure means central banks may not need to keep hiking.
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It all traces back to the Middle East. Trump said a deal to reopen the Strait of Hormuz could be signed within days. That hope pulled oil down and dragged yields with it.
A day earlier, the market had braced for the ECB to keep tightening. Thursday was about hikes, and Friday was about cuts.
The rally wasn't just in bonds. Europe's STOXX 600 rose about 1.8%, and the euro hit a four-week high.
The euro's jump shows money moving back into the region.
Banks led the charge. Deutsche Bank jumped more than 6%, while Santander and BNP Paribas each gained more than 5%.
Chipmaker ASML added more than 3%. Europe's main index hit a 15-week high.
The wave spread well past Europe. Wall Street's S&P 500 had its best day since April.
Asia ran with it on Friday. South Korea's market rose more than 8% at one point, and Japan's Nikkei added as much as 4%.
There was one weak spot, though. UK data showed the economy shrank 0.1% in April.
For now, this is a bet on a deal that isn't signed. Khoon Goh of ANZ said the rally likely needs a real signature and a fully open Hormuz to hold.
A signed deal could push yields even lower. A collapse would send them right back up.
Yields had climbed all week on rate-hike fears. Friday clawed a chunk of that back.
For borrowers, softer yields point to cheaper loans ahead. For savers, returns get a little thinner.
Until the ink is dry, the bond market is trading on a headline, not a deal.
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