Euro Zone Bonds Steady as War Brings Inflation, Growth Risks

• Euro zone yields steady as war rumbles on
• Euro area inflation jumped to 2.5% in March
• Growth fears mount due to energy shock

By Harry Robertson

LONDON, March 31 (Reuters) - Euro zone government bond yields were little changed on Tuesday after falling the previous day, as traders weighed the chances of an end to the Iran war and digested data showing inflation in the bloc jumped in March due to surging energy prices.

Yields had retreated from multi-year highs on Monday, with investors appearing to refocus on the risk of weaker growth stemming from the energy shock.

Germany's 10-year yield DE10YT, the euro zone benchmark, was last down 1 basis point at 3.029%. Yields move inversely to prices.

It was on track on Tuesday to rise 38 bps in March, despite Monday's dip, the biggest monthly increase since late 2022. The yield hit its highest since 2011 on Friday at 3.13%.

Euro zone inflation rose sharply to 2.5% in March from 1.9% in February as energy prices surged, data showed on Tuesday.

Andrew Kenningham, chief Europe economist at Capital Economics, said the figures said little about how long the inflation spike would last, which "will depend on the duration and severity of the Iran conflict".

Germany's two-year yield DE2YT, which is sensitive to European Central Bank interest rate expectations, was last flat at 2.629%.

The yield has risen 62 bps in March as traders have bet on rate hikes, putting it on track for its biggest monthly rise since mid-2022.

DRAWN OUT WAR THREATENS GROWTH

Brent crude oil prices held above $110 a barrel after Iran attacked and set ablaze a fully loaded crude oil tanker off Dubai on Monday.

Yet hopes of a resolution to the conflict remained, with the Wall Street Journal reporting that U.S. President Donald Trump had told aides he was willing to end the campaign even if the key Strait of Hormuz remains largely closed.

The latest data and forecasts show the ECB may have to grapple with rising inflation and slowing growth.

Germany's leading economic institutes cut their growth forecasts for this year and next and sharply raised their inflation predictions in response to the Iran conflict, sources told Reuters on Tuesday.

"Growth implications are increasingly concerning," said Gabriele Foa, global credit portfolio manager at Algebris Investments.

"Euro area GDP growth for the next quarter is now expected to be close to zero and could turn negative under high oil price scenarios."

Traders on Tuesday were pricing in just below 75 bps of ECB rate hikes this year, down from almost 90 bps at one point on Friday.