Oil jump sends euro zone yields higher, German curve at steepest in a month

LONDON, May 21 (Reuters) - Euro zone government bond yields rose on Wednesday as higher oil prices added further pressure to longer-dated bonds, already struggling globally due to worries about countries' fiscal positions, particularly the U.S.

Germany's 10-year yield, the benchmark for the euro zone, rose 6 basis points to 2.66%, while Italy's 10-year yield climbed nearly 9 basis points to 3.7%. DE10YT=RR, IT10YT=RR

Partly responsible for the move was oil, as Brent futures LCOc1 rose more than 1% on Wednesday after reports that Israel could be preparing to strike Iranian nuclear facilities.

This, combined with above expectations British inflation data were "helping to hoist bond yields across the curve", said Kenneth Broux, head of corporate research FX and rates at Societe Generale, said in a note. O/R

Britain's annual inflation rate hit 3.5% in April, its highest reading since January 2024.

Even with inflation near the European Central Bank's 2% target, rate setters are still keeping a wary eye on it when setting policy.

Markets expect the ECB to cut its key rate to 1.75% by the end of this year; those expectations had been nearer 1.5% last month at the height of worries about the global economic hit from tariffs. EURESTECBM5X6=ICAP

Yields in Europe have been moving higher this week, dragged along by U.S. Treasury yields, which have been rising on concerns about the U.S. fiscal position as a tax cutting bill works its way through Congress.

The U.S. 10-year yield was last up nearly 6 bps at 4.54%. US10YT=RR US/

In addition, longer-dated bond yields have been rising more than shorter-dated ones as investors demand a greater premium to hold longer-dated debt.

That has caused yield curves to steepen, in market parlance, and the German two-10 yield curve was at its steepest in over a month, with the 10-year yield 79 bps higher than the two year. DE2DE10=RR

If energy prices stay permanently higher, "it is potentially another stone in the sticky inflation and bear steepening pond", Broux said.

Curves "bear steepen" when the gap between longer and shorter dated yields increases because longer-dated yields are rising.

Japanese super-long yields have also moved sharply higher this week, and the 30- and 40-year yields hit new all-time peaks on Wednesday. JP/

Trading Wednesday was also complicated by a Bloomberg Terminal outage which disrupted numerous government bond sales according to several European debt management offices.