Euro zone bonds slide for second week 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, according to analysts.

Oil prices climbed again on Friday in choppy trading as investors reacted to headlines about oil flows through the key Strait of Hormuz.

France and Italy have opened talks with Iran seeking to negotiate a deal to guarantee safe passage for their ships through the Strait, the Financial Times reported on Friday, although Italy denied the report.

Money markets are pricing in a more than 60% chance of an ECB rate hike by June, according to LSEG data. Before the war started they saw a small chance of a cut this year.

"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 rose 3 basis points (bps) on the day to 2.9723% as prices fell. It was on course for a weekly jump of 11 bps, following a 21 bps rise last week.

Italy's 10-year government bond yield IT10YT=RR climbed 5 bps to 3.7876%. It was up 15 bps for the week after jumping 36 bps last week.

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 10% despite efforts to ease the energy supply shock. It was up 1% to $101.20 a barrel on Friday.

Traders on Polymarket are pricing in around a 20% chance of a ceasefire by the end of the month, compared with 45% earlier this week.