UPDATE 1-Euro zone yields steady near multi-year highs as investors catch their breath

Euro zone bonds steadied on Tuesday, with ​yields just shy of multi-year highs hit the previous day ​when investors braced for a sustained period ‌of high ​energy prices that could spill over into broader inflation and cause central bank rate hikes. Helping the mood on Tuesday was a social media post from U.S. President Donald Trump saying he had ‌paused a planned attack against Iran after Tehran sent a peace proposal to Washington, and that there was now a "very good chance" of reaching a deal limiting Iran's nuclear program. That sent Brent crude down 1.8% to $110 a barrel, and also supported bonds. Germany's 10-year yield, the benchmark for ‌the euro zone, was down 1 basis point at 3.14%.

It rose as high as 3.19% on Monday, its highest since ‌2011, and has risen dramatically from below 2.70% before the Iran war began. Global bond markets have been broadly moving in line with each other, as central banks around the world all keep a wary eye on energy costs and their impact on inflation.

On Tuesday, the 10-year Treasury yield was down nearly 2 bps at 4.61% after ⁠hitting a ​one-year high on Monday of 4.31%. Elsewhere ⁠in Europe, Italy's 10-year yield was also down 2 bps at 3.92%. However, analysts at UBS said in a note they thought "the market may be underestimating cross-country differences ⁠in economic impact and central bank reaction functions."

They argue the fact the euro area is facing a larger economic hit from the war should limit ​the amount of European Central Bank rate increases, and so support euro zone bonds. UBS analysts see the gap between U.S. ⁠and German 10-year yields widening to 150 bps from its current 144 bps.

Markets currently see around an 80% chance of a 25 basis point ECB rate hike next month ⁠and ​see two further such moves as likely by year end. They are not fully pricing any Fed hikes this year, though last week's hot inflation data left traders seeing around a 60% chance of one 25 bp hike by the end of the year, ⁠and markets have long priced out earlier expectations of rate cuts.

British government bonds outperformed on Tuesday with their 10-year yield down around 4 ⁠bps at 5.08% after data ⁠showed Britain's employers reduced hiring and posted fewer job vacancies in April, prompting investors to cut their bets on Bank of England interest rate hikes. Shorter-dated yields in the euro zone were also roughly aligned with longer-dated ‌ones on Tuesday. ‌Germany's two-year yield dropped 1 bp to 2.71%.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)