Euro zone government bond yields slip amid US-Iran peace hopes

May 6 (Reuters) - Euro area government bond yields eased on Wednesday as oil prices slipped below $110 per barrel and markets priced in a European Central Bank deposit rate just under 2.75% by year-end amid hopes of a U.S.-Iran peace agreement.

U.S. President Donald Trump said on Tuesday he would briefly pause an operation to help escort ships through the Strait of Hormuz, citing "great progress" toward a comprehensive agreement with Iran.

Tensions around the Strait of Hormuz have fuelled inflation concerns and expectations of ECB rate hikes, lifting borrowing costs across Europe.

Germany's 2-year yields, more sensitive to expectations for policy rates, fell 3.5 basis points (bps) to 2.65% on Wednesday. They reached 2.771% in late March, the highest since July 2024.

Germany's 10-year government bond yield, the euro area's benchmark, was down 3 bps at 3.04%. It reached 3.133% last week, its highest level since 2011.

Money markets priced in an ECB deposit facility rate at 2.71% in December from the current 2% while indicating an around 85% chance of a first tightening move next month.

Italy's 10-year government bond yields fell 6 bps to 3.82%.

The yield gap of Italian government bonds versus bunds was at 75.5 bps. It was at 63 bps before the attack on Iran and hit 103.62 in late March, the highest level since June 2025. (reporting by Stefano Rebaudo; editing by Andrew Heavens)