Euro zone yields inch higher; US data, Middle East tensions in focus

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Euro zone bond yields edge higher

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Investors weigh US-Iran tensions

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Markets pricing in a less than 50% chance of an ECB rate cut this year

(Updates pricing in Europe afternoon)

By Stefano Rebaudo

Feb 19 (Reuters) - Euro zone government bond yields inched higher on Thursday, staying close to their multi-month lows and echoing moves in U.S. Treasuries, ?while markets continued to price less than a 50% chance of ?a European Central Bank rate cut in 2026. Investors were also concerned about the potential inflationary impact of a further rise in oil prices, driven by ?mounting tensions between the U.S. and Iran.

Brent futures rose, while Russia urged both Tehran and "other parties" to exercise ?prudence and restraint. President Donald Trump on Thursday said that the U.S. had ?to make a meaningful deal with ?Iran and referenced good talks with the country.

However, fixed-income markets are expected to stay in wait-and-see mode ahead of a slate of U.S. data ?due on Friday. Germany's 10-year government bond yield, the euro area's ?benchmark, rose less than one basis point (bps) to 2.75%. It reached 2.725% on Tuesday, its lowest level since December 1, and was around 2.90% early this month.

WEAK SIGNALS FROM EURO ?AREA DATA Euro area economic data offered some weak ?signals, including the European ?Union trade surplus shrinking further as tariffs weighed and rising Chinese imports crowded out domestic production, and German investor morale unexpectedly falling in February. U.S. Treasury yields rose, with the benchmark 10-year yield up 0.9 ?bps at 4.09%, after climbing the day before as solid economic data reinforced expectations the Federal Reserve ?will keep rates on hold. It reached 4.018% on Tuesday, its lowest since November 28.

Barclays analysts said the Federal Reserve minutes reinforced their view that risks around the baseline rate path are skewed to the upside, noting that any easing moves could easily be delayed if inflation pressures prove more persistent than expected.

They still expect the Fed to ?deliver two ?rate cuts this year. U.S. policymakers were in near-unanimous agreement to keep interest rates on ?hold at their meeting last month, but remained split over their next steps. Traders now see an around 30% chance ?of a rate cut by December 2026, compared with 20% last week, though expectations have eased from more than 40% on Tuesday.

"To move this (to increase the chances of an ECB rate cut) we would likely need a sharp fall in inflation, a much stronger euro, or a series of deteriorating growth figures," said Michiel Tukker, rate strategist at ING.

YIELD CURVE STEEPENING

"We don't see any of these factors materialising in the very near term," he added, arguing that he expects a further steepening of ?the yield curve as long-dated borrowing costs rise. Germany's 2-year yields, more sensitive to the policy rate outlook, were up 0.7 bps at 2.06%. Italy's 10-year government bond yields rose 1 bps to 3.36%. The gap versus Bunds was at ?57.18 bps, after falling to 53.50 in mid-January, its ?lowest level since August 2008. (Reporting by Stefano Rebaudo, additional reporting by Sophie Kiderlin; ?Editing by David Holmes, Alexandra Hudson)