Euro zone bond yields rise as oil climbs on Hormuz doubts

European bond yields climbed on Tuesday due to a rise in oil prices following US President Donald Trump's demand for Iran to pay its own compensation for past damages, reducing the chances of an agreement to reopen the Strait of Hormuz. Germany's 10-year bond yield increased by 2 basis points to 3.198%, while Italy and France's yields rose by 3 basis points.

The yield rise signifies that bond prices fell, as yields and prices move inversely. Iran had reportedly made progress on a final deal with Oman to define new shipping lanes, but insisted the United States must meet conditions, including compensation, before the Strait could reopen. Oil prices edged up slightly on Tuesday, with Brent crude surging 0.5% to $88.20 after jumping 5% on Monday as the likelihood of a near-term Hormuz deal dwindled.

Mohit Kumar, a senior European economist at Jefferies, noted that "we are back to the situation where there is no war ongoing, but the Strait of Hormuz remains closed," implying that the longer the Strait stays blocked, the more inventory depletion and oil price impact there will be. Money market traders were pricing in 41 basis points of additional ECB tightening this year, up from 37 basis points late on Friday.

Bond markets also awaited Wednesday's US CPI inflation report, which would impact Federal Reserve rate decisions and have ripple effects on global bond markets.