Euro zone yields tick higher as Trump's Iran deadline looms

By Sophie Kiderlin

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

Iran showed no sign of agreeing to U.S. President Donald Trump's demand that it open the Strait of Hormuz by the end of Tuesday or suffer massive attacks on its civilian infrastructure.

"It seems to be that we are at a pivotal moment now," Philip Shaw, chief economist at Investec, said.

"The range of outturns are either you get an agreed ceasefire at least for a while or you see a huge escalation in the conflict, and markets are genuinely unsure which way to turn. Therefore we're all waiting for later on tonight or any news of negotiations through the course of the day."

The yield on the benchmark German 10-year Bund DE10YT=RR was last up by 3.3 basis points to 3.0294%.

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 as hopes of potential de-escalation emerged.

Markets have been reacting strongly to any shifts relating to the war in the Middle East as they have been trying to navigate the conflict's potential impact on inflation, economic growth and central bank interest rates.

Belgian central bank chief Pierre Wunsch told the Wall Street Journal in remarks published on Tuesday that the European Central Bank may need to raise interest rates if the war drags on, and a move as early as April 30 cannot be ruled out.

Markets were last pricing in at least two interest rate hikes, with a strong chance of a third, from the ECB 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 4.4 bps to 2.6682%.

The yield on Italy's 10-year government bond IT10YT=RR was last up 3.3 bps to 3.9023%, with the gap between the German and Italian 10-year bond yields DE10IT10=RR last standing at around 86 bps.