Euro zone yields edge up with Iran in focus ahead of ECB meeting

June 11 (Reuters) - Euro zone government bond yields edged closer to recent peaks on Thursday, as investors watched moves in oil prices and an escalation in hostilities in the Middle East ahead of the European Central Bank's policy decision later in the day.

Markets widely expect the ECB to raise interest rates by 25 basis points and will closely watch any signals about the future policy path. The United States and Iran traded air attacks on Thursday for a second straight day, with U.S. President Donald Trump vowing further strikes if Tehran does not immediately agree to a peace deal.

An agreement that reopens the Strait of Hormuz would ease constraints on energy supplies, helping to dampen inflation pressures, reduce expectations of further monetary tightening, and push bond yields lower. Germany's 2-year yields, more sensitive to expectations for policy rates, rose 1.5 basis points (bps) to 2.72%. They reached 2.771% in late March, the highest since July 2024.

Money markets indicated the ECB deposit rate at 2.73% in December, from the current 2%. They also fully priced a rate hike in September. Germany's 10-year government bond yield, the euro area's benchmark, was up 1 bp at 3.08%. It reached 3.20% in mid-May, its highest level since May 2011. Italy's 10-year government bond yields rose 1.5 bps to 3.86%.

(reporting by Stefano Rebaudo; Editing by Louise Heavens)