Euro zone yields edge up amid uncertainty over Middle East conflict

By Stefano Rebaudo

June 17 (Reuters) - Euro zone government bond yields edged up on Tuesday with high levels of uncertainty over the conflict in the Middle East.

Investors were also awaiting the outcome of the Federal Reserve policy meeting later this week.

U.S. President Donald Trump said he wanted a "real end" to the nuclear problem with Iran and indicated he might send senior American officials to meet with Iranian counterparts as the Israel-Iran air war raged for a fifth straight day.

German 10-year yields, which serve as the benchmark for the euro area, rose 0.5 basis points to 2.54%. Two-year Schatz yields climbed 2 bps to 1.86%.

"This looks like a minor regional shock, while the way the conflict is resolved will have a significant impact," Philippe Waechter, chief economist at Ostrum AM, said.

He saw no significant impact on long-term interest rates in the United States or Europe.

"And investors, unsure of which direction it will take, are in a wait-and-see position," he said.

Waechter added that the oil price had not exceeded its level at the beginning of this year and pointed to media reports suggesting that Saudi Arabia could increase its oil supply.

The world oil market appears well-supplied this year in the absence of a major disruption, the International Energy Agency said on Tuesday.

Brent crude futures rose 2.9%, after dropping sharply the day before.

Markets slightly reduced their bets on the European Central Bank easing cycle, pricing in an ECB deposit facility rate at 1.78% in December from 1.75% last week.

German investor morale rose more than expected in June, the ZEW Economic Research Institute said on Tuesday.

Fed policymakers will begin a two-day meeting on Tuesday amid risks of a new commodity price shock and fresh U.S. data expected to show a drop in retail sales and sluggish factory output in May.

U.S. Treasury yields fell after data showing a drop in retail spending last month.

Italian bonds slightly underperformed Bunds, with yields on the 10-year rising 2 bps to 3.51%. The yield gap versus Bunds was at 97 bps; it hit 84.20 bps last week, its lowest since March 2015.

(Reporting by Stefano Rebaudo; editing by Mark Heinrich and Andrew Heavens)