Euro zone yields rise as oil climbs above $110, turns up heat on ECB

By Amanda Cooper

LONDON, March 19 (Reuters) - Euro zone government bond yields rose on Thursday, ahead of a European Central Bank rate decision, as global bonds and stocks sold off in light of another jump in the oil price and after the U.S. Federal Reserve forecast higher inflation.

An Israeli attack on Iran's largest natural gas field on Wednesday pushed the crude price above $110 a barrel, sending fresh shockwaves through markets.

On Wednesday, the Fed left interest rates unchanged, but forecast higher inflation. Individual projections show a "meaningful" number of policymakers see fewer chances of further rate cuts this year than they did three months ago, as the ongoing Middle East conflict clouds the outlook.

German 10-year yields DE10YT=RR rose nearly 5 basis points at 2.98%, challenging last week's 2-1/2-year highs, while two-year yields DE2YT=RR were up nearly 8 bps at 2.524%, their highest since August 2024.

The Swiss National Bank and Swedish Riksbank left interest rates unchanged, with a nod to the more complex outlook for inflation given the surge in energy prices. The Bank of England is up next, ahead of the ECB, with neither expected to make any changes to monetary policy.

Markets show traders believe the ECB will deliver at least two rate hikes this year, from having priced around a 40% chance of a cut in 2026 prior to the war erupting.

ECB President Christine Lagarde has said the central bank will do what is necessary to keep inflation from running away, and investors will be looking for any sign from her of how current market pricing stacks up against policymakers' expectations.

"Given that various speakers emphasised the parallels to 2022, Lagarde's remarks at today's press conference should become tough," Commerzbank strategist Hauke Siemssen said.

He said that, given that markets are leaning in favour of a rate hike as early as June, "Lagarde would need to boost rate hike expectations for the next meeting in April to meaningfully weigh on the market."

Elsewhere, Treasury yields rose in response to traders cutting the chances of two Fed rate hikes this year, leaving two-year notes up 6 bps on the day for a yield of 3.803% US2YT=RR.

Within the euro zone, Italian 10-year yields IT10YT=RR, which have risen by more than 50 bps since the start of the Middle East war, were up another 7.5 bps at 3.81%.