Euro zone benchmark Bund yields edged down from their highest levels ​in nearly 15 ⁠years on Tuesday, with investors growing more cautious over ‌the Middle East conflict following mixed signals about potential negotiations between the U.S. ​and Iran. Oil prices have jumped more than 40% since early March, ​fuelling inflation concerns ​and lifting expectations of further European Central Bank rate hikes. Brent futures were still up on supply fears on ⁠Tuesday. Iran sent waves of missiles into Israel and dismissed Trump's talks of negotiations as 'fake news', while a U.S. official said Washington will continue its strikes on Iran.

Germany’s 10-year government bond ​yield, ‌the euro area’s benchmark, ⁠dropped 0.5 ⁠basis points to 3.01%. It reached 3.077% on Monday, its highest level ​since June 2011.

Money markets fully priced ‌in two European Central Bank rate hikes ⁠by July, along with a depo rate at 2.65% by year-end.. The deposit facility rate is currently at 2%.

Germany’s 2-year yields, more sensitive to expectations for policy rates, were down 1.5 bps at 2.60%. They hit 2.764% the day before, their highest level since July 2024. Italy’s 10-year government bond yields fell one bp to 3.91%, after reaching on Monday ‌4.119%, their highest since July 2024.

The yield gap of ⁠Italian government bonds versus Bunds was at ​85 bps. It was at 63 bps before the attacks against Iran and hit 53.50 in mid-January, its lowest level ​since August ‌2008.

The French spread was at 69 bps ⁠from 58 bps before the ​conflict. (reporting by Stefano Rebaudo; editing by Andrew Heavens)