Euro zone government bond yields rise as markets weigh rate-hike risks

LONDON, May 4 (Reuters) - Borrowing costs across ​the euro zone ⁠were up on Monday, with markets wary ​that the European Central Bank could soon hike rates to contain inflation even as oil prices nudged down from recent highs.

Government bond ​yields ‌extended their rise after Iran's Fars news agency reported that a U.S. warship intending to pass through the Strait of ⁠Hormuz was turned back, adding that the vessel had been struck ⁠by two missiles. But they pared ​their increase after senior U.S. officials denied the report.

Overall trading conditions were thin with UK markets closed for a public holiday.

Germany's benchmark 10-year Bund yield was around 4 basis points higher at 3.05%, while Italian peers rose about ​the same ‌amount to 3.88%.

Rate-sensitive two-year bond yields were up around 6 bps across the bloc .

While oil prices were holding below last week's four-year peaks, they remain above $100 per barrel with the Strait of Hormuz still closed due to the U.S.-Israeli war with Iran - prolonging the impact of a global energy shock.

Money markets price in ​about an 85% chance of a quarter-point interest rate hike at the ECB's June meeting and fully price in ‌three rate increases this year.

The ECB may need to tighten policy, perhaps as soon as June, policymakers said on Friday, warning that the inflation ‌outlook is deteriorating and the risk is rising that high price growth becomes entrenched.

The central bank on Thursday debated hiking rates and signalled, in both on- and off-the-record comments, that higher rates would remain on the agenda ​as it fears an energy-induced inflation spike could persist beyond a one-off impact.

"ECB sources suggested almost a tightening bias and possibly a ‌couple of rate hikes if there is no relief on energy prices," said Commerzbank rates strategist Rainer Guntermann.

"However, new tariff threats for European carmakers are likely to weigh on risk sentiment and growth prospects, thereby complicating the ⁠ECB's potential ⁠response in June."

U.S. President Donald Trump said on Friday he would ‌increase tariffs on cars and trucks from the EU to 25% this week from the previously agreed 15%, saying the bloc had not ​complied with its trade deal ​with Washington.

On Monday, Bank of France Governor Francois Villeroy de Galhau said ‌he expected the inflation rate to return to 2% in 2027-2028 after a spike this year triggered by higher energy prices.

An ECB rate hike in June is all but inevitable, Slovak policymaker Peter Kazimir said.