Euro zone yields rise as investors remain cautious about a US-Iran deal

By Stefano Rebaudo

June 1 (Reuters) - Euro area government bond yields rose on Monday as investors stayed wary of a potential U.S.-Iran deal to reopen the Strait of Hormuz, a development that could ease inflation pressures and reduce expectations for European Central Bank tightening.

Borrowing costs tracked moves in oil prices, which were up 1.5% on Monday but below $95 and seen as a proxy for future inflation.

The U.S. said it struck Iranian military sites at the weekend and Iran's Revolutionary Guards said on Monday it had targeted a U.S. base in response, but President Donald Trump reiterated that Iran really wanted to make a deal.

Money markets are pricing the ECB deposit facility rate at 2.58% by December, up from the current 2% but slightly down from the 2.53% level seen last Friday. They also indicated an about 80% chance of a first hike this month.

Germany's 2-year yields, more sensitive to expectations for policy rates, rose 3 basis points (bps) to 2.56%. They reached 2.771% in late March, the highest since July 2024. Germany's 10-year government bond yield, the euro area's benchmark, was up 4 bps at 2.97%. It reached 3.13% in late March, its highest level since June 2011.

Italy's 10-year government bond yields rose 3.5 bps to 3.70%.

The yield gap of Italian government bonds versus bunds stood at 70 bps. It was at 63 bps before the attack on Iran and hit 103.62 in late March, the highest level since June 2025. (Reporting by Stefano Rebaudo; Editing by Jamie Freed)