Euro zone bond yields rise amid caution over potential US-Iran deal

(Adds comments, background)

By Stefano Rebaudo

June 1 (Reuters) - Euro area government bond yields rose on Monday as investors stayed wary of a potential U.S.-Iran deal to reopen the Strait of Hormuz, a development that could ease inflation pressures and reduce expectations for European Central Bank tightening.

Borrowing costs tracked moves in oil prices - which were up 2.5% on Monday, but still below $95 - seen as a proxy for future inflation.

The U.S. said it struck Iranian military sites at the weekend and Iran's Revolutionary Guards said on Monday they had targeted a U.S. base in response, but President Donald Trump reiterated that Iran really wanted to make a deal.

Money markets are pricing the ECB deposit rate at 2.60% by December, up from the current 2% and slightly above the 2.53% level priced in on Friday. They also indicated about an 80% chance of a first rise this month.

"A jaded cynicism has come over investors, and in the absence of a definite statement from Iran there is a tendency to downplay comments from the U.S. administration," Paul Donovan, chief economist at UBS Global Wealth Management, said.

Germany's 2-year yields, more sensitive to expectations for policy rates, rose 6 basis points to 2.59%. They reached 2.771% in late March, the highest since July 2024.

"Ultimately, hopes prevail that a possible framework agreement will pave the way for gradually normalising traffic in the Strait of Hormuz," Rainer Guntermann, economist at Commerzbank, said.

Investors are also monitoring macroeconomic data for early signs of how the energy shock is affecting the economy, while waiting for next week's ECB policy meeting.

Inflation in the euro zone's four largest economies hovered above the ECB's 2% target for a third straight month in May, preliminary data showed on Friday.

Meanwhile, growth in manufacturing lost momentum in May as demand for goods stagnated and supply-chain disruptions linked to the Middle East war pushed input costs to their highest in four years.

Germany's 10-year government bond yield, the euro area's benchmark, was up 5 bps at 2.98%. It reached 3.13% in late March, its highest level since June 2011.

Italy's 10-year government bond yields rose 6 bps to 3.71%.

The yield gap of Italian government bonds versus bunds was at 71 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 Jan Harvey)