Bund yields at 2-1/2-year high on inflation fears; central banks in focus

March 16 (Reuters) - Euro zone benchmark ​Bund ⁠yields hovered near their highest in almost ​2-1/2 years on Monday, as the Middle East conflict stoked inflation fears and reinforced expectations ​of ‌monetary tightening ahead of a week packed with central bank meetings.

Oil prices rose about ⁠1% on Monday and are up more than ⁠40% this month as Tehran ​halts shipments through the Strait of Hormuz in retaliation for U.S.–Israeli air strikes.

The Federal Reserve will announce its policy decision on Wednesday, with the European Central Bank, ​the ‌Bank of England and the Bank of Japan following a day later.

Central banks are expected to hold interest rates this month, but investors will focus on any clues as to how policymakers might respond to the economic ​impact of the conflict in the Middle East.

Yields on Germany’s 10-year government bond, ‌the euro zone benchmark, rose 0.5 basis point to 2.98%. On Friday they touched 2.994%, the highest level since ‌October 2023.

Money markets are fully pricing in a European Central Bank rate hike by July, along with an 85% chance of a second increase by year-end.

Germany’s ​2-year yield, more sensitive to expectations for policy rates, was flat at 2.43%, having hit 2.476% ‌last week, the highest since August 2024. Italy’s 10-year government bond yield bp to 3.79%. Although German bonds have lost some of their safe-haven appeal, spreads widened ⁠when war ⁠developments hurt risk appetite.

The 10-year yield spread between ‌Italian government bonds and Bunds was at 80 bps, widening from 63 bps before the U.S. and ​Israel launched ​the war on Iran. The spread had narrowed ‌to 53.50 in mid-January, its smallest since August 2008.

French 10-year bonds were yielding 68.50 bps more than Bunds , compared with 58 bps before the conflict began.