Euro zone bonds extend gains as oil falls, Iran deal optimism picks up

Germany's 10-year bond yield, the benchmark for the euro zone, was last down 3.5 basis points to 3.1158%. It fell 5 basis points on Monday from a near 15-year high after oil prices dropped when U.S. President Donald Trump said talks with Iran were imminent.

Trump's comments revived hopes of a deal to reopen the Strait of Hormuz energy shipping route, though Iran later denied that negotiations were being held or planned.

Analysts at Commerzbank said that with the German 10-year yield in the middle of its recent range, there was scope for it to test the bottom of that range around 3.10% in the absence of negative headlines about the conflict.

"However, it's likely that more concrete positive news would be needed for Bunds to return to their previous range near 3%," they added.

Bond prices move inversely to yields. Since the war in the Gulf began at the end of February, European bonds have largely tracked developments in the region, particularly moves in oil and gas prices.

Policymakers are watching closely for signs that higher energy costs could feed into broader inflation pressures and require more aggressive interest-rate increases.

Those worries have weighed on bond prices, and sent yields to multi-year highs.

Other euro zone bonds were broadly in line with the benchmark on Tuesday. French 10-year yields were down 4.1 bps at 3.89% and Italian 10-year yields fell 5.6 bps to 3.89%. Germany's 2-year yield was last down 4.7 bps to 2.7178%.

LONDON, Aug. 4 - Euro zone bond prices extended the previous day's gains on Tuesday as oil prices retreated and hopes for a diplomatic resolution to the Middle East conflict grew stronger again.

Deal optimism rose after Qatar on Tuesday said mediators were making progress in efforts to end the U.S.-Iran war, and Treasury Secretary Scott Bessent said a deal on reopening the Strait of Hormuz could be reached as early as Tuesday or Wednesday.