Updates pricing in European afternoon, refreshes context

By Samuel Indyk

LONDON, May 20 (Reuters) - Euro zone government bond yields pulled back on Wednesday after trading around multi-year highs earlier in the week on expectations that central banks will need to raise interest rates to tame inflation caused by higher energy prices.

U.S. President Donald Trump said on Wednesday that negotiations with Iran were in the final stages, while warning of further attacks if Tehran does not agree a deal.

Two oil tankers also exited the Strait of Hormuz, lifting hopes that the war might be resolved soon.

Cooler-than-forecast British inflation also eased some pressure on bond markets.

Germany's 10-year yield DE10YT=RR, the benchmark for the euro zone, was last down 9.4 basis points at 3.09%. It rose to 3.2% on Tuesday, its highest in 15 years.

HIGHER LONG-END YIELDS

Even if a deal to end the war is agreed soon, oil and gas supplies are expected to be disrupted for months, likely boosting inflation and crimping growth.

"The shortcomings resulting from the blockade of the Strait of Hormuz are going to continue for a while," said DZ Bank analyst René Albrecht.

Albrecht said elevated oil prices, higher inflation and a resilient U.S. economy pointed to higher long-end rates going forward.

Governments across the world are providing fiscal support to soften the impact of higher oil prices, which could also pressure the long end of the curve. Germany last month announced fuel tax cuts.

Germany's 30-year yield DE30YT=RR was last down 7.2 bps at 3.62%, after hitting 3.716% on Tuesday, its highest since mid-2011.

ECB TO HIKE?

Markets shifted their interest rate expectations quickly at the start of the war. Prior to the conflict, the European Central Bank was expected to keep rates on hold through 2026, but markets now price in at least two 25-bp hikes.

Germany's two-year yield DE2YT=RR - highly sensitive to changes in near-term rate expectations - was down 9.8 bps at 2.65%.

Below-forecast UK inflation helped sentiment, although the outlook remains clouded by elevated energy prices.

Britain's 10-year gilt yield GB10YT=RR was down 14.8 bps at 4.99%, while the U.S. 10-year yield US10YT=RR was at 4.57%, after hitting a 16-month high the day before.

Japanese bond yields were also a touch lower - after rising to a 29-year peak on Tuesday - following a solid auction of 20-year bonds.