Updates for late European morning trading

By Samuel Indyk

LONDON, May 14 (Reuters) - Germany's 10-year bond yield was slightly lower on Thursday but remained close to its recent multi-year peak as elevated energy prices solidified expectations for faster inflation and rate hikes from the European Central Bank.

Investors were keeping a close eye on events in Beijing, with the U.S.-Israeli war on Iran looming large over U.S. President Donald Trump's visit to China.

Expectations for a lasting peace deal between the U.S. and Iran have faded this week, keeping the Strait of Hormuz effectively closed to maritime traffic. Trump is expected to ask Chinese President Xi Jinping to help end the war, although just prior to his trip he said he did not need assistance.

Commerzbank rates strategist Hauke Siemßen said an easing in oil prices late on Wednesday was likely to support euro zone bonds on Thursday morning, especially with many European investors off for the Ascension Day holiday.

Germany's 10-year yield DE10YT=RR, the benchmark for the euro zone, was last down 3 basis points (bps) at 3.08%, having risen more than 40 bps since the outbreak of the conflict. It remained close to the 3.133% level touched at the end of April, its highest point since mid-2011.

ECB SET TO HIKE

The surge in oil prices since the outbreak of the conflict has reignited worries about stagflation - higher inflation and slower growth - and prompted investors to price in rate hikes from the ECB.

Money market traders now price in a nearly 90% chance of a rate hike at the June 11 meeting, with three hikes almost fully priced in by the end of the year. Prior to the conflict, investors were expecting the ECB to keep its deposit rate on hold throughout 2026.

"With oil prices moving higher again since last week’s short-lived optimism on the possibility of an imminent U.S.-Iran deal, it seems that time is running out to prevent a pre-emptive hike in June," said Citigroup European rates strategist Jamie Searle.

Germany's two-year bond yield DE2YT=RR, which is sensitive to monetary policy, was down 3.5 bps on Thursday at 2.681% but has risen almost 70 bps since the outbreak of the war in late February as investors repriced rate expectations.

Market participants also expect the Federal Reserve to be less dovish this year as inflation accelerated by more than expected last month. U.S. producer prices posted their biggest increase in four years in April, while consumer prices rose at their fastest annual pace in three years, data showed this week.

The inflation increase has put paid to rate cuts from the Fed this year, and poses a problem for Kevin Warsh, Trump's pick to lead the Fed when Jerome Powell's term ends on Friday.

Eyes were also on Britain, where British Prime Minister Keir Starmer was attempting to brush off challenges to his authority from within his own party after unfavourable results in local elections last week.

Britain's 10-year government bond GB10YT=RR was down 3 bps at 5.04%. It hit 5.13% on Tuesday, its highest point since 2008.