Euro zone bond yields jumped on Tuesday and markets were pricing in three interest rate rises by the European Central Bank this year as hopes faded for a peace deal in the U.S.-Iran war. U.S. President Donald Trump said the ceasefire with Iran was "on life support" after Tehran rejected a U.S. proposal to end the conflict and stuck to a list of demands that Trump has described as "garbage".
Germany's 2-year yield, which is regarded as more sensitive to rate expectations, rose 6.3 basis points to 2.7085%.
Benchmark Brent crude futures were last around 2.1% higher at $106.44 a barrel amid the uncertainty over the Middle East conflict, with the crucial Strait of Hormuz still almost fully closed.
"With no progress in the Middle East and oil prices rising further above $100, market and macro sentiment remains more downbeat," Christoph Rieger, head of rates & credit research at Commerzbank, said in a note.
Interest rate expectations picked up again on Tuesday, with money markets fully pricing in three 25 basis point interest rate hikes from the ECB by the end of the year. The probability of a policy increase in June was last at close to 90%.
The yield on the German 10-year bond, the benchmark for the euro zone, was 4.3 bps higher at 3.0875%. Italy's 10-year bond yield jumped 8.7 bps to 3.8684%.
The German federal statistics office on Tuesday said that EU-harmonised inflation stood at 2.9% in April, confirming preliminary figures.
