Euro zone bond yields rise as markets up ECB rate hike bets

* Traders price in a 70% chance of a third ECB hike by December

* BofA says a repeat of 1970s energy shock is unlikely even if war escalates

* Bond yield spreads well below late March highs (Updates latest price moves, updates lede, adds ECB speakers comments from Monday)

By Stefano Rebaudo and Lucy Raitano

April 13 (Reuters) - Euro zone government bond yields edged up towards recent peaks on Monday after the U.S. and Iran failed to secure a deal to end the war, pushing oil prices higher and prompting traders to up their bets that the ECB will hike interest rates in 2026.

Brent crude futures climbed above $100 a barrel as the U.S. Navy prepared to block ships to and from Iran via the Strait of Hormuz, a move that could restrict Iranian oil exports.

Meanwhile, money markets priced in a 44% chance of a rate increase in April from 25% late on Friday. The deposit facility rate is currently at 2%.

Traders are betting on an ECB deposit facility rate of about 2.68% by year-end, implying two hikes and a 70% chance of a third move, from around 2.60% late on Friday.

Markets see the ECB leaning hawkish even as an energy shock threatens to weigh on growth.

Germany's two-year yields, more sensitive to expectations for policy rates, were up 6 bps at 2.64%. They reached 2.771% in late March, their highest level since July 2024.

Meanwhile, Germany's 10-year government bond yield rose 4 basis points (bps) to 3.09%. It reached 3.13% in late March, its highest level since June 2011.

Analysts argued that while the truce was more fragile after the weekend, both parties were unlikely to let full-blown war resume.

"The temporary truce briefly reduced immediate tail risks, but the failure of negotiations over the weekend has underscored that the constraints that matter most for near-term (energy) pricing remain unresolved," Tobias Keller, investment strategist at UniCredit, said.

"In our view, a repeat of the 1970s appears as an unlikely scenario, even if the war escalates," said Antonio Gabriel, global economist at BofA. The global economy has gradually become less dependent on oil since then, he added.

The ECB's incoming vice president, Boris Vujcic, said on Monday that current energy prices are still closest to the ECB basic scenario and they should not influence inflation and growth, N1 regional television reported.

Current ECB Vice President Luis de Guindos said that any European Central Bank rate rise will depend on how a war-fuelled surge in the cost of crude oil and some chemicals impacts other prices.

EGB SPREADS WELL BELOW LATE MARCH HIGHS

Italy's 10-year government bond yields rose 3.5 bps to 3.89%. They reached 4.142% in late March, the highest since July 2024.

The yield gap of Italian government bonds (BTPs) versus Bunds was at 78.08 bps. It was at 63 bps before the U.S.-Israeli war on Iran began and hit 103.62 during the conflict, the highest since June 20, 2025.

"We would probably need to see a more significant escalation for BTP-Bund spreads to test the March highs again," Hauke Siemssen, rate strategist at Commerzbank, said.

"BTPs should also underperform OATs (French government bonds) again this week as they are more susceptible to energy prices, while we expect the spread to re-tighten over the long term," he added.

The French spread was at 65.11 bps from 58 bps before the conflict. Fitch confirmed on Friday its A+ rating for France with a stable outlook. (Reporting by Stefano Rebaudo; Editing by Susan Fenton and Andrew Heavens)