Euro zone bond yields fall as markets cling to peace talk hopes

LONDON, May 22 (Reuters) - Euro zone bond ​yields ⁠fell on Friday as investors reacted ​to signs of progress in Iran peace talks, pulling government borrowing costs away ​from ‌the multi-year highs reached earlier in the week.

Germany's 10-year bond yield, the ⁠benchmark for the bloc, fell 4 basis points (bps) ⁠to 3.062%, while Italian ​and French yields fell slightly further . Yields move inversely to prices.

The German 10-year yield hit a 15-year high of 3.2% on Tuesday as investors ​braced for ‌interest rate hikes after the disruption from the Iran war sent energy prices surging.

Yet Brent crude oil prices fell on Thursday and last traded at around $104 a barrel, compared to $113 on ​Monday, as both Iran and the U.S. reported some progress on ‌peace talks.

U.S. Secretary of State Marco Rubio said there had been "some good signs" in talks. ‌A senior Iranian source told Reuters on Thursday that no deal has been reached but that gaps have been narrowed.

"Geopolitical headlines continue to ​drive market volatility," said Benjamin Schroeder, senior rates strategist at ING.

"Even if signals remain conflicting ‌at times, there is a suggestion of progress – or at least a narrowing of the gap between the warring parties' positions."

Germany's 2-year bond ⁠yield, ⁠which is sensitive to European Central Bank interest ‌rate expectations, fell 4 bps to 2.642%.

Traders in money markets on Friday priced in ​around 65 ​bps of rate hikes from the ECB this ‌year, implying two increases and a 60% chance of a third. That was down from more than 70 bps earlier in the week.