Euro zone bonds yields steady as energy crisis overshadows Iran ceasefire extension

LONDON, April 22 (Reuters) - Euro zone bond yields held steady on ​Wednesday as ⁠investors largely shrugged off U.S. President Donald Trump's indefinite extension ​of a ceasefire with Iran and kept their focus on the economic fallout from the closure of the Strait of Hormuz.

At 1021 GMT, yields on the euro ​zone ‌benchmark German 10-year bond were unchanged at 2.9991%. The interest-rate-sensitive German two-year yield rose 1.2 bps to 2.5293%.

Trump called off attacks on Iran indefinitely, though the Strait of ⁠Hormuz remained blocked on Wednesday with three ships reportedly hit by gunfire, and ⁠neither side showed up for peace talks in Pakistan.

"That's quite ​a negative outcome relative to what the market expectations were even just last Friday," said Megum Muhic, UK rates strategist at RBC Capital Markets.

"I am quite surprised how muted the reaction has been."

He pointed to Brent crude oil futures, which rose just 0.5% to around $99.05 a barrel ​on Wednesday.

"Front-end yields ‌in Europe and the UK have basically tracked that move in oil prices," said Muhic.

Rabobank analysts said in a note that their previous base case - a potential deal by the third week of April that would prompt a gradual reopening of the Strait and stabilise energy markets - could no longer happen.

"The U.S. economic blockade of Iran and the de facto Iranian blockade of Hormuz remain in place: critical ​energy and goods are not going to flow for longer, with exponentially rising economic damage," they wrote.

Meanwhile, the European Commission set out plans on Wednesday ‌to cut electricity taxes and coordinate the summer refill of countries' gas storage, as it seeks to cushion the energy fallout from the war.

European Central Bank policymaker Martins Kazaks said the ECB had ‌the "luxury" of not needing to rush into raising interest rates ahead of a key policy meeting next week, the Financial Times reported. In France, the government will offset the cost of the Iran crisis by freezing some spending.

Italy's 10-year yield fell 2 bps to 3.7694%, while ​its two-year yield was 1 bp higher at 2.7369%.

Italy posted a budget deficit of 3.1% of gross domestic product last year, statistics bureau ISTAT said on Wednesday, confirming previous ‌data and dashing Rome's hopes of exiting an EU disciplinary procedure for its "excessive" deficit.

A slew of ECB speakers are due on Wednesday as traders look for more direction on the central bank's policy stance. Among them is ECB President Christine Lagarde, who will speak on a panel later ⁠in the ⁠day.

Money markets see only a small chance of an ECB rate hike later this month ‌and price an 80% probability of no change, though they are close to fully pricing two 25-bp rate hikes by the year's end.

That marks a sharp reversal from before ​the war, when markets expected policy to ​remain on hold this year or even priced in a cut.

Elsewhere, data showed UK inflation ‌rose to 3.3%, as the impact of the Iran war began to feed through.

Germany's Bundesbank said on Wednesday that the German economy likely grew in the first quarter but that the Iran war is weighing on outlook.

Markets await the first reading of euro zone consumer confidence figures for April due later in the session. (Reporting by Lucy Raitano; Editing by Mark Potter)