LONDON: Most euro zone government bond yields rose on Wednesday as oil prices surged after US President Donald Trump abandoned a nuclear deal with Iran and expectations for higher US interest rates helped send Treasury yields to fresh highs.
US bond yields initially fell across maturities after US President Donald Trump's announcement on Tuesday that the country would withdraw from the international nuclear deal with Iran.
But that drop was short-lived as expectations grew that the Fed would raise interest rates at least three more times this year, pushing US bond yields to fresh highs in early European trade on Wednesday.
That sell-off dragged euro zone 10-year bond yields up 1-2 basis points.
"A confident Powell is putting upward pressure on the short-end of the US yield curve and that is cascading through the entire global bond market complex," said Ciaran O Hagan, head of euro area rates strategy at Societe Generale in London, referring to US Federal Reserve chief Jerome Powell.
Yields on two-year US Treasury debt rose to their highest levels since September 2008, pushing yields on equivalent German debt up by half a basis point to minus 0.56 percent.
The Fed has already raised interest rates six times since December 2015 when it began withdrawing its extraordinary policy stimulus put in place after the 2008 global financial crisis. Money markets have whittled down the odds of an interest rate hike from the European Central Bank by June 2019 to 75 percent.
The Fed's interest rate hikes may not pose as big a risk for global financial markets and emerging market economies as many have thought, the US central bank's chairman said on Tuesday, comments that the market widely saw as a sign that the Fed was unlikely to soften its policy stance.
Oil prices meanwhile rose more than 3 percent, hitting 3-1/2 year highs after the US quit the Iran deal, adding upward pressure on euro zone bond yields.
The single currency bloc imports oil and higher energy costs are likely to put upward pressure on inflation, although the US is less dependent on oil imports.
"Trump's decision on Iran was well telegraphed," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
"We have a higher oil price, which is consistent with higher inflation breakevens and that should push nominal yields higher too."
Elsewhere, Italian bonds recovered some ground after heavy selling on Tuesday, sparked by concerns of fresh elections in Italy.
Benchmark ten-year Italian debt briefly touched a fresh six-week high of 1.87 percent, before pulling back to 1.84 percent.
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