Euro zone short-dated yields rise as Hormuz tensions weigh on rate outlook

By Stefano Rebaudo

April 24 (Reuters) - Euro zone short-dated government bond yields were headed for their biggest weekly rise in over a month as tensions over the Strait of Hormuz spurred energy prices higher, stoking inflation fears and European Central Bank rate hike expectations.

Brent futures rose on Friday due to fears of a renewed military escalation in the Middle East after Iran released video of commandos boarding a cargo ship in the Strait of Hormuz, after the collapse of peace talks with Washington. U.S. President Donald Trump dismissed the threat posed by what he described as Iran's "little wise-guy ships" and told reporters that he believed Tehran wanted to make a deal but that its leadership was in turmoil. Germany's 2-year yields DE2YT=RR, more sensitive to expectations for monetary policy rates, rose 4.5 basis points (bps) on Friday to 2.6%. They reached 2.771% in late March, the highest since July 2024, and were set for a weekly rise of 17 bps. Investors shrugged off data showing German business morale fell more than expected in April, as the U.S.-Israeli war with Iran made companies more pessimistic and threatened the long-awaited recovery of Europe's biggest economy.

"The war in the Middle East and soaring energy prices have again exposed the fact that Germany is one of Europe's largest net importers of energy," said Carsten Brzeski, global head of macro at ING.

"Even if sentiment is suffering enormous setbacks right now and fears of another year of stagnation have returned, it should be clear that the planned investments in defence and infrastructure are still on track and should support the economy this year and beyond," he added.

The ECB is widely expected to place a stronger emphasis on bringing inflation under control, even if doing so comes at the expense of short-term economic growth. While markets believe the central bank is inclined toward a more hawkish stance to address the energy shock, they expect policymakers to remain on hold at next week's meeting. Germany's 10-year government bond yield DE10YT=RR, the euro area's benchmark, was up 3 bps at 3.04%. It reached 3.13% in late March, its highest level since June 2011. Money markets priced in an ECB deposit facility rate at 2.64% by year-end EURESTECBM6X7=ICAP - implying two rate hikes and about a 55% chance of a third move. Italy's 10-year government bond yields IT10YT=RR rose 6.5 bps to 3.83%. The yield gap of Italian government bonds versus Bunds DE10IT10=RR was at 78 bps, the highest level since April 8, the day after the U.S.-Iran ceasefire announcement.

(Reporting by Stefano Rebaudo; Editing by Emelia Sithole-Matarise)