Euro zone bond yields pull back as oil prices extend decline

Higher energy costs have been a key driver of inflation concerns across the euro zone, especially given the European economy's vulnerability to imported energy.

Various economic data points for the euro zone are due this week and could shed further light on the impact of the war on the economy so far, including a reading of the second-quarter gross domestic product and a flash estimate of July inflation figures.

The European Central Bank in June hiked interest rates by 25 basis points in an effort to tame inflationary pressures, but opted to leave policy unchanged at its July meeting last week.

Yet, policymakers have kept the door open to a potential interest rate increase in September.

Money markets have meanwhile slightly scaled back their expectations for further tightening from the ECB in recent days. However, they were last still pricing in a high chance of a September rate hike, with the possibility of another increase later in the year.

Euro zone bond yields fell for the third session in a row on Tuesday, as optimism about a diplomatic resolution to the Iran war and easing oil prices soothed short-term inflation worries.

Germany's 10-year government bond yield DE10YT=RR, the benchmark for the euro zone, was down 1.7 basis points at 3.1099%. Last week, it hit 3.2118%, which was its highest level since 2011.

A lull in hostilities between the U.S. and Iran continued after Washington's abrupt suspension of air strikes on Saturday. President Donald Trump said on Monday the United States was having "good talks" with Iran and there was a chance of a deal.

Brent crude futures LCOc1 extended declines and were around 2% lower on Tuesday at $86.58 a barrel.