Bund yields at their highest in 15 years on energy disruption fears

(Recasts throughout)

By Stefano Rebaudo and Amanda Cooper

LONDON, March 27 (Reuters) - Euro zone benchmark Bund yields climbed to their highest in 15 years, above 3%, as money markets fully priced in three European Central Bank rate hikes, despite Donald Trump extending a deadline for Iran to reopen the Strait of Hormuz.

Markets have increased bets on ECB rate hikes since the outbreak of the war in Iran in early March, expecting central banks to respond swiftly to oil-driven inflation pressures.

ECB President Christine Lagarde's comments that energy disruptions could last for years added pressure on long-dated bonds, reinforcing expectations of higher rates for longer.

Expectations for a swift return to normal may be overly optimistic, Lagarde said on Thursday.

Traders fully priced in on Friday three 25-bp ECB rate hike by September and a 60% chance of a first move by May. The depo rate is currently at 2% and the ECB will hold its next policy meeting at the end of April.

Trump said he would pause threatened attacks on Iranian energy plants for 10 days until April 6 at 8pm Eastern daylight time (0000 GMT on April 7).

German 10-year Bund yields, which serve as a benchmark for the wider euro zone market, were up 6.5 bps at 3.13%, their highest level since May 2011. They were set to end March 47 bps higher, in its biggest monthly rise since December 2022.

German two-year yields have not fared much better, having risen 72 bps this month, the most since August 2022.

"We think the ECB, like us, is expecting an initial inflation wave, starting with gasoline prices, followed by knock-on effects on transportation costs, food prices and other industrial products," said Carsten Brzeski, head of macro strategy at ING.

"As long as this remains a single, time-limited wave, there is no need for ECB rate hikes."

Adding to the pressure has been poor demand for government debt in the past few weeks. Treasury and Bund auctions have drawn far fewer bids than sales in previous months. The last 10-year Bund auction on March 11 drew the poorest demand since October, which in turn was the worst in several years.

FRANCE YIELDS AT THEIR HIGHEST SINCE 2009

Long-dated French bonds have been among the hardest hit given the country's dependence on energy imports and its more vulnerable public finances.

Debt-laden countries would suffer most in a higher-for-longer interest rate environment, which would push up debt servicing costs.

OATs hit their highest level since June 2009 at 3.879%, up 8 bps on day.

Italy's 10-year yield was at 4.115%, up 9 bps on day. It hit 4.119% early this week, its highest level since July 2024. The gap between 10-year Italian and German yields is now around its widest in nine months, at 98 bps.

(Reporting by Stefano Rebaudo and Amanda Cooper; Editing by Joe Bavier and Arun Koyyur)