Euro zone bond yields dip as traders weigh war impact

By Sophie Kiderlin and Harry Robertson

LONDON, March 30 (Reuters) - Euro zone bond yields fell from around multi-year highs on Monday, as investors mulled the risks of the Iran war for inflation and economic growth.

Data on Monday showed that German inflation jumped to 2.8% in March as energy prices surged due to the war, although that was in line with economists' expectations and bond markets reacted calmly.

Flash euro zone inflation figures are due on Tuesday and are expected to show the bloc's inflation rate climbed to 2.6% this month from 1.9% in February.

"There will be an inflationary shock, that's for sure," Felix Schmidt, senior economist at Berenberg, said, noting that higher gas and energy prices are feeding directly into consumer price inflation.

U.S. President Donald Trump on Monday said "great progress" had been made on peace talks but also threatened to obliterate Iran's energy infrastructure if it did not make a deal.

That came after Tehran said U.S. peace proposals were "unrealistic" and fired waves of missiles at Israel.

Bond yields cooled as traders gauged progress on the war, even as oil prices nudged higher.

German 10-year bund yields DE10YT=RR, the benchmark for the euro zone, were last 7 basis points (bps) lower at 3.032%. They hit 3.13% on Friday, their highest level since May 2011 and were last on track to end March around 38 bps higher.

Yields on Italian 10-year bonds IT10YT=RR were last down by 9 bps at 3.976%, having risen to their highest since mid-2024 on Friday above 4.14%.

HIGHER RATES, WEAKER GROWTH?

The longer the war continues, the more likely it is that the European Central Bank will have to react to tackle inflation, Berenberg's Schmidt said.

But, he pointed out, besides higher inflation, the ECB is also considering the possibility of economic growth stalling, or even contracting.

"And then it's going to be tough for the ECB to hike into that weak economy," he said.

Money markets were last pricing in around 72 bps of hikes from the ECB this year, down from almost 90 bps at one point on Friday.

German two-year bund yields DE2YT=RR were last down 6 bps at 2.616%, while the Italian two-year bond yields IT2YT=RR fell 7 bps to 2.931%.

They were last set to rise around 61 bps and 79 bps, respectively, in March.