Euro zone bonds head for second straight weekly decline as inflation fears deepen

By Niket Nishant

LONDON, March 13 (Reuters) - Euro zone government bonds were on track on Friday for their second consecutive weekly decline, as lingering concerns over the inflationary impact of the Middle East war pushed yields higher.

The surge in oil prices since the outbreak of the U.S.-Israeli war with Iran could exacerbate inflation worries and prompt the European Central Bank to raise interest rates, analysts said. Money markets are pricing in a 62% chance of an ECB rate hike by June, according to LSEG data.

"Policymakers were clinging on to any economic figures to give them an excuse to cut rates, but that conversation has now shifted," said Roy Kashi, CEO of investment advisory firm Falconedge.

Germany's 10-year government bond yield DE10YT=RR inched up 0.4 basis points on the day to 2.9471%, as prices fell. It was on course for a weekly jump of 8.5 bps.

Italy's 10-year government bond yield IT10YT=RR climbed 3.1 bps to 3.7648%.

The safe haven appeal of government bonds has been called into question during the current market volatility as investors have largely looked past them due to inflation worries.

The conflict also shows little sign of easing, dashing earlier hopes of a quick resolution. Iran's Supreme Leader Mojtaba Khamenei said Tehran will keep the Strait of Hormuz shut as leverage against the U.S. and Israel, defying threats from President Donald Trump.

Brent crude futures LCOc1 headed for a weekly jump of nearly 7% despite efforts to ease the energy supply shock.

Traders on Polymarket are pricing in a 22% chance of a ceasefire by the end of the month, compared with 45% earlier this week.