German yields close to multi-year highs; UK gilts also in frame

* German yields inch higher as Iran negotiations stall

* UBS says market pricing of ​ECB rate outlook ⁠too hawkish

* UK political developments also in focus (Updates with afternoon ​trading)

May 13 (Reuters) - German government bond yields ticked higher for a fifth successive session on Wednesday, with investors expecting the ECB to deliver 75 basis points of ​rate hikes ‌by the end of the year to tackle energy-driven inflation. Hopes for a lasting peace deal in the Middle East dwindled and Tehran tightened its grip over the ⁠Strait of Hormuz. Ahead of a high-stakes summit in Beijing, U.S. President Donald Trump ⁠said he did not think he would need to ​enlist Chinese President Xi Jinping to resolve the conflict.

A surge in oil prices following the outbreak of the Iran war on February 28 heightened inflation concerns and reinforced expectations of ECB rate hikes, driving borrowing costs higher across Europe. Germany’s 2-year yields, more sensitive to expectations for policy rates,were steady at 2.72% on ​Wednesday. They reached ‌2.771% in late March, the highest since July 2024. Germany’s 10-year government bond yield, the euro area’s benchmark, was about 1 bp higher at 3.11%. It reached 3.13% in late March, its highest level since June 2011. Earlier in the day euro zone yields were slightly lower but they rose in sympathy with U.S. Treasuries after the release of data showing U.S. producer prices in April posted their biggest monthly gain since early 2022. But ​some think the selloff in rates has gone too far.

“We continue to think that current pricing in the rates markets is too hawkish," Mark ‌Haefele, chief investment officer at UBS Global Wealth Management, said.

"This means quality bonds offer an appealing risk-reward in the current environment, as yields should fall either when investors scale back their expectations for rate hikes, ‌or when recession risks and rate cuts come into focus,” he added.

Money markets priced in an ECB deposit facility rate at about 2.75% by the end of the year from the current 2% while indicating a 90% chance of a first move next month. Italy’s 10-year government bond yields were ​flat at 3.88%.

The yield gap of Italian government bonds versus German Bunds dropped to 73.5 bps. It was at 63 bps before the attack on Iran and hit 103.62 in ‌late March, the highest level since June 2025.

UK GILTS IN FOCUS

Investors are closely watching UK political developments, which are expected to sway gilts, with 10-year yields hitting their highest since the 2008 financial crisis on Tuesday.

"The worry is that pressure on Prime Minister Keir Starmer could eventually lead to looser ⁠fiscal policy, ⁠while higher energy costs are feeding expectations that the Bank of England may have to raise interest ‌rates this year," Matt Britzman, analyst at Hargreaves Lansdown, said.

"It’s a tough mix: higher borrowing costs, weaker confidence and less room for the government to offer support if the economy slows," ​he added.

But yields on 10-year gilts ​fell on Wednesday, down 2 bps to 5.08%, after hitting 5.13% the previous day. Starmer, fighting for ‌his political survival, promised on Wednesday to press ahead with plans to reform Britain and warned of chaos if he were to be ousted. Britain's health minister Wes Streeting is preparing to resign and could quit as early as Thursday, the Times reported on Wednesday, adding that he is likely to mount a formal challenge for the party leadership.