By Stefano Rebaudo

Euro zone government bond yields fell on Wednesday after rising

the previous day, as investors continued to expect two European

Central Bank rate hikes this year amid uncertainty over

U.S.-Iran tensions.

Borrowing costs tracked moves in oil prices, which pulled back

from recent highs on Wednesday, erasing some of the previous

day's 4% gain.

Iran said on Tuesday the U.S. had violated a ceasefire by

striking targets near the contested Strait of Hormuz,

potentially complicating efforts to bring the war to a close.

Money markets are pricing the ECB deposit rate at 2.59% by

December, up from the current 2% but down

from the 2.75% level priced in last week. They also indicated an

80% chance of a first rise next month.

ECB board member Isabel Schnabel said the central bank should

raise interest rates in June, even if ongoing peace talks with

Iran yield a deal.

Germany's 2-year yields, more sensitive to

expectations for policy rates, fell 2.5 basis points to 2.57%.

They reached 2.771% in late March, the highest since July 2024

and dropped to 2.523% early this week, their lowest since May 7.

Germany's 10-year government bond yield, the euro

area's benchmark, was down 2 bps at 2.96%. It reached 3.13% in

late March, its highest level since June 2011.

Italy's 10-year government bond yields fell 3 bps to

3.69%.

The yield gap of Italian government bonds versus Bunds

was 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.