Updates for European late morning trading

By Samuel Indyk

LONDON, May 20 (Reuters) - A selloff in euro zone bonds paused on Wednesday with yields remaining close to the previous day's multi-year highs reached on expectations that global central banks will need to raise rates to tame inflation caused by higher energy prices.

Bonds were supported on Wednesday after two oil tankers exited the Strait of Hormuz, lifting hopes that the war in Iran may soon be resolved as U.S. President Donald Trump and Vice President JD Vance talked up the prospects of a peace deal.

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

Germany's 10-year yield DE10YT=RR, the benchmark for the euro zone, was last down 3 basis points (bps) at 3.16%. It rose to 3.2% on Tuesday, its highest level in 15 years.

HIGHER LONG-END YIELDS

Even if a deal to end the war is agreed soon, oil and gas supplies are still expected to face severe disruption 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 that elevated oil prices, higher inflation and a resilient U.S. economy point towards higher long-end rates going forward.

Governments across the globe are expected to provide fiscal support to lessen the impact of higher oil prices, which could also pressure the long end of the curve. Germany last month announced fuel tax cuts to ease pressure on consumers and businesses.

Germany's 30-year yield DE30YT=RR was last down 1 bp at 3.688%, after rising to 3.716% on Tuesday, its highest level since mid-2011.

ECB TO HIKE?

Markets were quick to shift their expectations for central banks at the outbreak of the war. Prior to the conflict, the European Central Bank was expected to keep interest rates on hold through 2026, but markets are now almost fully pricing in three rate hikes by the end of the year.

Germany's two-year yield DE2YT=RR, which is highly sensitive to changes in near-term interest rate expectations, was down 3 bps on Wednesday at 2.714%, and remains about 5 bps below its late March high.

Below-forecast UK inflation was helping the mood on Wednesday, although the outlook still looks tough as the Iran war pushes up energy prices.

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

"We had some good news out of the UK this morning with the CPI print. That has helped (bonds)," said DZ Bank's Albrecht.

Britain's 10-year gilt yield GB10YT=RR was down 7.5 bps at 5.05%, while the U.S. 10-year yield US10YT=RR was at 4.65%, after hitting a 16-month high the day before.