Euro zone yields tumble on peace hopes; US-German spread at 9-month high

* Euro zone yields fall ​as both ⁠sides flag Iran talks progress

* US yields fall less; US-German spread at ​9-month high

* Global yields jumped at start of week on inflation fears

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

The fall helped keep the spread between U.S. and German 10-year bond yields ⁠at around the widest since August 2025, reflecting rising bets on Federal Reserve rate ⁠hikes.

Germany's 10-year bond yield, the benchmark for the bloc, fell ​7 basis points to 3.0334%, its lowest level since May 11. Italian yields at one point touched their lowest level since May 11. 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 ‌and bonds tumbled around the world.

Yet Brent crude oil prices fell on Thursday and last traded at around $104.41 a barrel, compared with $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. Iran's foreign minister met his Pakistani counterpart on Friday to discuss proposals to end the war, Iranian media reported, while Qatar sent a negotiating team to Tehran to try to ​resolve key differences.

"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," said Benjamin Schroeder, senior rates strategist at ING. Inflation in the euro zone will be pushed up by the Iran war even if the Strait of Hormuz were to be reopened immediately, European Central Bank President ‌Christine Lagarde said on Friday.

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.

U.S.-GERMAN SPREAD RISING

While European yields have fallen back ​from multi-year peaks this week, aided by falling oil prices and economic fears, U.S. yields have remained relatively high.

The spread between the 10-year U.S. Treasury yield and its German counterpart rose above ‌154 bps on Thursday, its highest since August 2025, and last traded at 154.06 bps.

Markets now see a roughly 50% chance the U.S. Fed will hike rates this year, compared to expectations of two reductions before the war began.

"The repricing of Fed expectations has been the primary driver of higher (U.S.) rates," said Gennadiy ⁠Goldberg, head of U.S. ⁠rates strategy at TD Securities.

"Rising inflation expectations and still-solid growth momentum have contributed to the upward pressure."

U.S. ‌10-year yields have risen by almost 18 bps in May to more than 4.5%, their highest in 16 months, compared with an average 6-bp rise for the rest of the G7. ​German Bund yields, by contrast, are up around ​3 bps.

Two-year Treasuries, which reflect Fed rate expectations, have been the worst performing major-economy bonds in May, ‌up nearly 20 bps.

"Europe is more directly exposed to the energy market disruptions and stands to benefit most from a timely resolution to the blockage of the Strait of Hormuz," said ING's Schroeder. Survey data on Thursday showed economic activity in the euro zone shrank at its sharpest rate in more than two-and-a-half years in May.