Euro zone bond yields rise as Trump's Iran deadline looms

By Sophie Kiderlin

LONDON, April 7 (Reuters) - Euro zone bond yields rose on Tuesday as uncertainty over the Iran war persisted and a U.S.-imposed deadline for a deal on the conflict loomed large.

Iran and Israel traded attacks as Tehran refused to reopen the Strait of Hormuz and accept a ceasefire deal ahead of a Tuesday night deadline from U.S. President Donald Trump to agree to his demands or get "taken out".

Still, markets held on to some hopes for de-escalation as they mulled the potential impact of the conflict on inflation, economic growth and central bank interest rates.

"Markets remain torn between escalation fears and ceasefire hopes. While some relief may be warranted as the war in Iran did not escalate further over the long Easter weekend, Trump's extended Tuesday night deadline is still looming large," Hauke Siemssen, rates strategist at Commerzbank, said.

With the latest Iran developments firmly in focus and oil prices above the $110 per barrel mark, markets remained "headline driven, and small announcements can cause large swings in yields and spreads," he said.

The yield on the benchmark German 10-year Bund DE10YT=RR was last up by 1.8 basis points to 3.0131%.

Government bonds worldwide came under pressure soon after the war started on February 28, with yields jumping higher as inflation expectations surged on spiking energy prices. Euro zone bond yields broadly recorded their first weekly decline since the start of the conflict last week.

Markets were last pricing in at least two interest rate hikes, with a strong chance of a third, from the European Central Bank by the end of the year, broadly in line with expectations prior to the long weekend. Before the Iran war broke out, markets had seen a small chance of a rate cut from the ECB this year.

German 2-year yields DE2YT=RR, which are more sensitive to rate expectations, were last up 3.1 bps to 2.6546%.

The yield on Italy's 10-year government bond IT10YT=RR was last up 2.7 bps to 3.8964%, with the gap between the German and Italian 10-year bond yields DE10IT10=RR last standing at around 87 bps.