Euro zone bond yields jump as oil prices rise again

By Sophie Kiderlin and Amanda Cooper

LONDON, March 18 (Reuters) - Euro zone government bond yields jumped on Wednesday, reversing course from earlier in the day, as oil prices rose in response to reports of attacks on Iranian energy facilities.

Investors on Wednesday were also awaiting interest rate decisions and possible comments on the inflation outlook from an array of central banks, including the Federal Reserve later in the day.

German 10-year Bund yields DE10YT=RR were last up around 4 basis points to 2.9441% after having eased earlier in the day.

Bund yields, a benchmark for the wider euro zone, are up around 29 bps since the U.S.-Israeli war on Iran drove up energy prices, prompting investors to consider the possibility that interest rates might soon rise, which damages the appeal of fixed-income assets.

ATTACKS ON ENERGY INFRASTRUCTURE

Two-year yields DE2YT=RR have risen by over 44 bps this month. They were last around 8 bps higher at 2.4578%, having been flat earlier in the day. Shorter-dated yields are typically more sensitive to interest-rate expectations.

"After 2.5 days of relative calm, today's headlines have reminded markets that the situation in the Iran is far from over. Direct attacks on energy infrastructure have rightly led to a reaction, with (European government bonds) selling off and yield spreads to Germany widening," Alex Everett, senior investment manager at Aberdeen Investments said.

"European yields are vulnerable to both increased inflation potential and deteriorating risk appetite," he said.

Italian 10-year yields IT10YT=RR were up 10 bps at 3.76%, while French 10-year yields FR10YT=RR rose 6.3 bps at 3.62%.

The spread between the German and Italian 10-year bond yields widened and was last at around 78 bps.

AWAITING WORD FROM POWELL

Oil prices LCOc1 were last around 5.8% higher at $109.39, after hovering around the $100-mark earlier in the day. They are up by over 50% since the start of the war, as marine traffic that carries roughly 20% of the world's daily energy supplies through a choke-point controlled by Iran has been mostly cut off.

Also in the mix on Wednesday was the U.S. producer price index, which rose 0.7% in February - more than expected.

The Fed is not expected to announce any changes to monetary policy, but what Chair Jerome Powell says about another repeat of the energy shock that followed Russia's invasion of Ukraine in early 2022 could set the tone for the ECB, which meets on Thursday.

The ECB is also not expected to make any changes to policy. So traders will be looking for any sign from ECB President Christine Lagarde about how justified current market pricing is for two possible rate rises this year and what parallels the head of the central bank might draw with 2022.

TODAY COMPARED WITH 2022

"I thought it was quite interesting that (Lagarde) has highlighted how oil and gas prices were a lot more elevated at the time (in 2022), compared to where we are now," Camille de Courcel, who is head of developed market rates and strategy for Europe at BNP Paribas Markets 360, said.

"...it does give a perception that they are in no rush to hike. But she also said they will do whatever it takes to keep inflation under control, which clearly suggests that if they need to act, indeed they will, and it will be a hike."

On the data front, a final read of harmonised euro zone inflation for February showed the core rate, which excludes food, energy, alcohol and tobacco, rose 2.4% last month, in line with expectations.