By Niket Nishant
LONDON, March 9 (Reuters) - Euro zone government bonds fell sharply on Monday, extending last week's selloff and driving yields higher as fears of a prolonged fallout from the widening war in the Middle East pushed up oil prices and worsened inflation concerns.
Germany's 10-year government bond yield, the bloc's benchmark, rose 2.3 basis points to 2.886% after hitting its highest level in a year earlier in the session.
The yield on the interest-rate-sensitive two-year bond rose 8.6
bps to 2.393%, a mark last seen in September 2024.
Investors have looked past the safe-haven appeal of global bonds, focusing instead on inflation risks as the U.S.-Israel war with Iran disrupts traffic through the Strait of Hormuz, a crucial oil shipping route.
The supply shock lifted crude prices to their highest since 2022, and the conflict shows little sign of easing.
Iran named Mojtaba Khamenei on Monday to succeed his father Ali Khamenei as supreme leader, defying U.S. President Donald Trump and signalling that hardliners remain firmly in charge in Tehran.
"One after another, geopolitical catastrophes that kept scenario planners awake for decades have delivered smaller-than-expected (oil) price spikes. But a Strait of Hormuz shutdown is a big deal," said Kevin Book, an expert at the Center for Strategic and International Studies.
Euro zone inflation expectations hit 2.25%, according to money market data, their highest since July 2024.
Higher crude prices have also compounded investor unease about the rate outlook for central banks, reviving the possibility of policy tightening.
The risk of higher borrowing costs is particularly acute in countries that are reliant on energy imports. Yields on the two-year British government bond soared 24.3 bps.
However, a French government source said the Group of Seven finance ministers will discuss the possibility of a joint release of emergency oil reserves at a meeting on Monday, calming some jitters.
(Reporting by Niket NishantEditing by Bernadette Baum and Pooja Desai)
