July 27 (Reuters) - Government bond yields across the euro

zone fell on Monday as easing oil prices helped to calm

short-term inflation fears after U.S. President Donald Trump's

decision to suspend attacks on Iran and leave room for

diplomacy.

Oil prices tumbled more than 5% after the U.S. and Iran halted

strikes, raising hopes of a diplomatic solution that would allow

shipping to resume in the Strait of Hormuz.

Germany's 2-year yields, more sensitive to

expectations for policy rates, fell 2.5 basis points (bps) to

2.79%, having reached 2.8938% last week for the highest level

since July 2024.

Money markets slightly scaled back bets on the European

Central Bank deposit rate to 2.67% for December

and 2.72% for February 2027, up from the

current 2.25%. They fully priced a depo rate at 2.75% last week.

The ECB still considers the current inflation shock to be

medium-sized, which requires some policy action but not

aggressive moves. It expects price growth to return to 2% in the

next year or so, ECB chief economist Philip Lane said.

The central bank kept interest rates unchanged as expected on

Thursday but held the door open for another increase in

September.

Germany's 10-year government bond yield, the euro

area's benchmark, was down 3 bps at 3.14%. It reached 3.2118%

last week for its highest since May 2011.

Italy's 10-year government bond yields fell 5 bps to

3.95%.

The spread between Italian government bonds and Bunds

was at 79 bps. It was at 63 bps in February before

the attack on Iran and hit 103.62 in late March, the highest

since June 2025.