Euro zone bond yields ticked up on Tuesday as oil prices rose after U.S. President Donald Trump demanded Iran pay its own compensation to the U.S., further dimming the prospect of an imminent deal to reopen the Strait of Hormuz.
Germany's 10-year bond yield rose 2 basis points to 3.198%, after climbing 5 bps on Monday on the back of rising oil prices. Yields rise as prices fall and vice versa.
Trump on Monday said Iran should pay compensation for people killed in wars, attacks and protests, in response to Tehran's demands for compensation and an end to sanctions.
Iran earlier on Monday said it was nearing a final pact with Oman defining new shipping lanes through the Strait, but repeated that the U.S. must meet conditions, including compensation, before opening the key energy waterway.
Oil prices ticked slightly higher on Tuesday, with Brent crude up 0.5% at $88.20 after rising 5% on Monday as the prospect of a near-term Hormuz deal slipped away.
Germany's 2-year bond yield, which is sensitive to European Central Bank rate expectations, rose 2 bps to 2.809% after rising 5 bps on Monday.
"We are back to the situation where there is no war ongoing, but the Strait of Hormuz remains closed," Mohit Kumar, a senior European economist at Jefferies, said.
"The longer the Strait is closed, more inventories will be depleted and greater would be the impact on oil prices."
Traders in money markets were last pricing in 41 bps of further ECB monetary tightening this year, up from 37 bps late on Friday.
Bond markets were also waiting for Wednesday's U.S. CPI inflation report, which will influence the Federal Reserve's rate decisions and have knock-on effects for bond markets around the world.
Italian and French 10-year bond yields were both up 3 bps.
