Euro zone bond yields rise with oil prices on Iran strikes

LONDON, May 28 (Reuters) - Euro zone bond yields rose on Thursday after the U.S. and Iran traded strikes, threatening their ceasefire agreement and pushing oil prices up around 3%.

Germany's 10-year bond yield rose 2 basis points (bps) to 3.005%.

The two-year German bond yield, which is more sensitive to European Central Bank interest rate expectations, rose 4 bps to 2.617%. Yields move inversely to prices.

The U.S. carried out what a Washington official said were strikes on an Iranian drone operation near the Strait of Hormuz, after President Donald Trump rejected a report he was close to a compromise deal with Tehran.

In response, Iran's Revolutionary Guard targeted a U.S. airbase on Thursday.

"Markets remain wary in the face of headlines from Iran as renewed strikes overnight render an imminent deal less likely," said Rainer Guntermann, rates strategist at Commerzbank.

"Negative headlines leave markets in limbo, preventing sustained relief dynamics."

Brent crude oil rose 2.5% to $96.65 a barrel.

Money markets increased their bets on rate hikes and were last pricing in just under 65 bps of tightening from the ECB this year, up from under 60 bps late on Wednesday. (Reporting by Harry Robertson Editing by Shri Navaratnam)