Euro zone bond yields rise as Middle East peace deal hopes subside 

LONDON, May 12 (Reuters) - Euro zone bond yields ​climbed on Tuesday ⁠and markets were pricing in three interest ​rate rises by the European Central Bank this year as hopes faded for a peace deal in the Iran war.

U.S. ​President ‌Donald Trump said the ceasefire with Iran was "on life support" after Tehran rejected a U.S. proposal to end the ⁠conflict and stuck to a list of demands that ⁠Trump has described as "garbage".

"Clearly there has been a ​lot of back and forth gyrations that we've had over the last few weeks when it seemed there was no hope, then there was a lot of hope, then we're back to little hope. So it's ​very hard ‌to know what the final endpoint is," Sandra Horsfield, economist at Investec, said.

Germany's 2-year yield, which is regarded as more sensitive to rate expectations, was 5.1 basis points higher at 2.6971%.

Interest rate expectations picked up again on Tuesday, with money markets pricing in around three 25-basis-point interest rate hikes from the ECB ​by the end of the year. The probability of a policy increase in June was last at ‌close to 90%.

ECB policymaker Joachim Nagel said on Tuesday the ECB must raise interest rates if the oil shock resulting from the Iran war ‌threatens to unmoor inflation expectations in the euro zone.

"Should the effects prove large or persistent, and especially if they threaten to de-anchor long-term inflation expectations, our mandate requires us to act," Nagel, the head of Germany's ​Bundesbank, told a central bank event.

Andrzej Szczepaniak, senior European economist at Nomura, said it was almost guaranteed that inflation expectations ‌will rise further, thus opening the door for the ECB to raise rates at its June meeting.

The central bank will try to get ahead of so-called second-round inflation effects like a wage-price spiral, he said.

"Basically, the ⁠ECB will ⁠be saying by raising rates once or twice, hey, look, we're not ‌going to leave inflation or inflation expectations unchecked. We're going to make sure we get ahead of things and ensure that inflation ​stabilizes at target over the ​medium term," Szczepaniak said.

The yield on the German 10-year bond, the benchmark ‌for the euro zone, was 4.3 bps higher at 3.0863%. Italy's 10-year bond yield jumped 7.4 bps to 3.8559%.

The German federal statistics office on Tuesday said that EU-harmonised inflation stood at 2.9% in April, confirming preliminary figures.