May 13 (Reuters) - German government bond yields hovered

around their multi-year highs on Wednesday as markets expected

the European Central Bank to raise rates by 75 basis points by

year-end to counter inflation driven by the energy shock.

Hopes for a lasting peace deal in the Middle East dwindled

and Tehran tightened its grip over the Strait of Hormuz. Ahead

of a high-stakes summit in Beijing, U.S. President Donald Trump

said he did not think he would need to enlist Chinese President

Xi Jinping to resolve the conflict.

A surge in oil prices following the outbreak of the Iran war

on February 28 heightened inflation concerns and reinforced

expectations of ECB rate hikes, driving borrowing costs higher

across Europe.

Germany's 2-year yields, more sensitive to

expectations for policy rates, fell 0.5 basis points to 2.70% on

Wednesday. They reached 2.771% in late March, the highest since

July 2024.

Oil prices fell slightly on Wednesday, snapping a three-day

rally.

Germany's 10-year government bond yield, the

euro area's benchmark, was flat at 3.10%. It reached 3.13% in

late March, its highest level since June 2011.

Money markets priced in an ECB deposit facility rate at

about 2.75% by the end of the year from the

current 2% while indicating a 90% chance of a first move next

month.

Italy's 10-year government bond yields dropped

1.5 bps to 3.83%.

The yield gap of Italian government bonds versus bunds

dropped to 73.5 bps. It was at 63 bps before the

attack on Iran and hit 103.62 in late March, the highest level

since June 2025.