June 4 (Reuters) - Euro zone government bond yields

declined on Thursday, mirroring movements in oil prices, as a

ceasefire deal between Israel and Lebanon raised hopes for a

broader agreement to end the U.S.-Israeli war on Iran.

A U.S.-Iran agreement to reopen the Strait of Hormuz is

expected to ease energy-driven inflationary pressures and dampen

expectations for further central bank rate hikes.

U.S. President Donald Trump suggested on Wednesday that

there could be progress in negotiations with Iran as soon as

this weekend.

Germany's 10-year government bond yield, the

euro area's benchmark, was down 1.5 basis points at 3.02%. It

rose to 3.13% in late March, its highest level since June 2011.

Its 2-year yields, more sensitive to expectations

for policy rates, dropped 2 bps to 2.65%. They reached 2.771% in

late March, the highest since July 2024.

However, euro zone money markets are pricing the ECB deposit

rate at 2.65% by December, which implies

two rate hikes and a 60% probability of a third move. They also

indicated a 90% chance of a first rise this month.

The ECB is set to raise its deposit rate to 2.25% on June

11, with another increase likely in September, as it balances

energy-driven inflation against a weakening economy, a Reuters

poll of economists showed.

Italy's 10-year government bond yield was down 2

bps at 3.77%, with the yield gap of Italian government bonds

versus Bunds at 72 bps. It was at 63 bps before

the U.S.-Israeli strikes on Iran in late February and hit 103.62

in late March, the highest level since June 2025.