Euro zone bond yields rise as oil climbs on Iran ceasefire doubts

By Harry Robertson

LONDON, March 26 (Reuters) - Euro zone bond yields rose on Thursday as energy prices climbed again, with traders growing sceptical over the conflicting claims about the status of ceasefire talks between the U.S. and Iran.

Money markets also moved to price in more monetary tightening from the European Central Bank after German Bundesbank chief Joachim Nagel told Reuters that raising interest rates in April is "an option".

Germany's two-year bond yield DE2YT=RR, which is sensitive to ECB rate expectations, rose 7 basis points (bps) to 2.675%, after falling 4 bps on Wednesday. Yields rise as prices fall and vice versa.

Iran's foreign minister said his country was reviewing a U.S. peace plan but had no intention of holding talks on ending the conflict, contradicting President Donald Trump's claims that Iran was desperate to make a deal.

Oil prices rose as the two sides struggled or refused to find a way forward, with international benchmark Brent crude LCOc1 up around 4% to $106.30 a barrel.

Bond yields have largely moved in tandem with energy prices that have jumped as Iran severely disrupts oil and gas flows in the region, driving an inflationary shock that may force the ECB to hike interest rates.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, rose 8 bps to 3.035% on Thursday, after falling 6 bps on Wednesday on reports of ceasefire talks.

Italian yields rose more than most of their peers, with the 10-year IT10YT=RR up 12 bps at 3.959%. That pushed the spread between Italian and German 10-year yields DE10IT10=RR up to 92 bps.

Money markets on Thursday were pricing in more than 75 basis points of ECB hikes by the end of the year, up from around 71 priced in late on Wednesday.

"Markets are appreciating U.S. efforts to seek a deal, but without concrete steps, the overarching narrative of two to three ECB rate hikes this year remains unchanged," said Michiel Tukker, senior European rates strategist at ING.

ECB policymaker Nagel told Reuters he and his colleagues will have enough information about the war's economic impact to decide on a potential rate hike in their April 29-30 gathering.

"It is certainly an option, but just one option," he said of an April rate increase.

Traders last saw around a 65% chance of a rate increase by April, broadly the same as on Wednesday.