Euro zone bonds steady, traders eye war headlines and Warsh hearing

LONDON, April 21 (Reuters) - Euro zone government bonds held steady on Tuesday as traders watched to see whether peace talks between the U.S. and Iran would take place, and awaited the Senate confirmation hearing for Kevin Warsh, President Trump's pick to lead the Federal Reserve. Bond markets in March and early April swung sharply in response to headlines related to the war in the Middle East, as investors feared sustained high energy prices would force central banks to tighten policy to prevent a broader surge in prices.

But there were few new developments to react to on Tuesday. The U.S. expressed confidence that peace talks with Iran would go ahead in Pakistan and a senior Iranian official said Tehran was considering joining, but significant hurdles and uncertainty remained as the end of a ceasefire approached.

Germany's 10-year yield, the benchmark for the euro zone, dropped a bit less than one basis point to 2.97%, while its interest-rate-sensitive two-year yield was flat at 2.45%.

Markets continue to price a very small chance of a European Central Bank rate hike later this month, though they see a 25-basis-point rate increase as more likely than not by June, and are close to fully pricing two such moves by year end.

Other euro zone bonds were largely moving in line with the benchmark. Italy's 10-year yield was steady at 3.71%.

As well as war headlines, later in the day, investors will be watching the appearance of Warsh before U.S. lawmakers.

Trump has openly vented his frustration at current Chair Jerome Powell for not lowering rates more. Analysts at ING said Warsh will have to "tread a fine line between making the case for lower borrowing costs, which helped him get the nomination from the President, and preserving the Fed's inflation-fighting credentials." (Reporting by Alun John; Editing by Muralikumar Anantharaman)