Euro zone bond yields rise as Iran negotiations cancelled and ECB talks tough

Euro zone government bond yields rose on Friday as oil prices ticked higher and European Central Bank policymakers expressed tough stance on inflation, with Germany's 10-year bond yield rising 6 basis points.

Euro zone government bond yields rose on Friday as oil ​prices ticked higher after U.S.-Iran peace negotiations in Switzerland ​were abruptly called off and as European ‌Central ​Bank policymakers talked tough on inflation.

Germany's 10-year bond yield, the benchmark for the bloc, rose 6 basis points to 2.987%, having fallen to a more than two-month low of ‌2.915% on Wednesday. Bund yields were on track to end the week little changed, with a dip of just 1 bp. Oil prices inched into positive territory to trade at $80 a barrel, above lows touched on Thursday after Switzerland said U.S. talks with ‌Iranian negotiators on a pact to end the Middle East conflict would not take place on Friday.

Brent and U.S. ‌crude prices have fallen sharply since the U.S. and Iran reached a tentative agreement to end their war at the weekend but doubts remain about the longevity of the deal, which faces opposition from some U.S. Republicans and many in Israel. ECB policymaker Pierre Wunsch told Reuters that the central bank may ⁠raise interest ​rates one more time as ⁠soon as next month if it sees more evidence of euro zone inflation spreading beyond energy, even with the interim peace deal in place.

Wunsch's ⁠comments followed remarks by ECB chief economist Philip Lane that the euro zone's economy may now be able to withstand slightly higher interest ​rates without losing steam. The comments added to the upward pressure on yields, with Germany's 2-year bond yield up 4 ⁠bps at 2.64%.

Short-dated yields, which are more sensitive to ECB rate expectations, have fallen less than their longer-dated peers as traders continue to fully price ⁠in ​another rate hike this year, after last Thursday's 25 bps increase to 2.25%. "Despite oil marking its lowest price since the beginning of March, money markets continue to firmly price in another hike from the ECB to be delivered in ⁠September or October," said Benjamin Schroeder, senior rates strategist at ING.

"Uncertainty on the geopolitical front remains, and the ECB might be ⁠reluctant to change its direction ⁠having just delivered a rate hike," he said. "Sticking to more hawkish communication also ensures that higher market rates will continue to do their part in containing inflation."

Italy's 10-year yield rose 7 ‌bps to 3.71%, up from ‌Wednesday's three-month low of 3.619%.