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

LONDON/GDANSK, May 21 (Reuters) - Euro zone government bond yields rose on Wednesday as higher oil prices added to pressure on 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 4 basis points to 2.637%, while Italy's 10-year yield was up 3 basis points to 3.645%. DE10YT=RR, IT10YT=RR

Partly responsible for the move was oil, as Brent futures LCOc1 rose nearly 2% earlier on Wednesday, before paring some gains to trade up half a percentage point, after reports that Israel could be preparing to strike Iranian nuclear facilities.

This, combined with stronger than expected British inflation data was "helping to hoist bond yields across the curve," 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, the bank's rate setters are still keeping a wary eye on it when setting policy.

Markets expect the ECB to cut its key rate to 1.74% 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 more than 5 bps at 4.535%. US10YT=RR US/

An auction of 20-year Treasuries later in the day US20YT=RR might give an indication of investor appetite for long-dated U.S. debt.

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, leading the German two-10 yield curve to hit its steepest in a month earlier in the session, 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.

Yield 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.