German yields set for fourth straight weekly rise on US-Iran tensions

Italy’s 10-year government bond yields were flat at 4.18%. The yield gap versus safe-haven Bunds was at 80 bps, down from 81.7 bps the day before.

Germany's 10-year bond yield was up 0.5 basis points at 3.36%, set for a weekly rise of 7.5 bps.

A survey showed on Tuesday that growth in the euro zone's manufacturing sector hit its fastest pace in more than four years in August, while inflation rose back above 3% on higher energy costs.

German two-year bond yields DE2YT=RR rose one basis point to 2.96% while heading for a weekly rise of 7 bps, the steepest since mid-July.

Traders were pricing the European Central Bank's deposit rate at 2.73% by December, implying a 90% chance of a second hike after September from the current 2.25%.

Markets continued to build momentum towards further policy tightening, with the policy rate last seen at 3% by September 2027, down from 3.1% on Wednesday.

The ECB will likely raise interest rates on September 10 for the second and final time in what would be its shortest hiking campaign in 15 years, according to a Reuters poll.

German government bond yields were on track for a fourth consecutive weekly rise, the biggest since mid-July, as investors bet central banks would keep policy restrictive to contain persistent inflation pressures in a resilient economy.

Investors were closely watching oil prices, which headed for their steepest weekly gain since mid-July as renewed U.S.-Iran hostilities heightened concerns over Middle East supply risks.

Meanwhile, Iranian sources said a U.S. campaign to throttle Iran's economy by blockading its oil exports and stopping sanctions evasion is growing increasingly difficult to withstand.