LONDON, Aug 14 (Reuters) - Euro zone bond yields rose on

Friday as the impasse between the U.S. and Iran over the Strait

of Hormuz continued, while oil prices remained subdued as

investors focused on signs of weaker demand.

Germany's 10-year bond yield rose 5 basis points

to 3.19% and was up 6 bps across the week.

The United States said on Thursday it could maintain a naval

blockade of Iran indefinitely as both sides claimed they had

control over the Strait of Hormuz.

Tehran has said it will not allow the strait to reopen until

its conditions, including removing economic sanctions and

releasing frozen Iranian assets, are met.

Despite the lack of progress on talks to resolve the

stand-off, oil prices have risen relatively modestly and are up

5% for the week after falling the previous two weeks, limiting

inflationary pressures.

Oil fell 2% on Thursday after U.S. oil inventories rose and

two major energy organisations lowered their demand forecasts.

Brent crude rose 1% on Friday to $88.20 a barrel.

U.S. Treasury yields edged higher after U.S. data, with the

10-year up 3 bps at 4.67%.

Germany's 2-year bond yield, which is sensitive

to European Central Bank rate expectations, rose 2.5 bps to

2.79% and was set to end the week 5 bps higher.

Traders in money markets were last pricing in around 40 bps

of further European Central Bank monetary tightening this year,

up about 2 bps from the start of the week.

"We see more chances for rate hikes to be priced out and

Bund yields to test the lower bound of their range," said

Christoph Rieger, head of rates at Commerzbank.

He pointed to subdued U.S. inflation data, which has an

impact on expectations for the euro zone economy, and said

Friday's U.S. retail sales figures could help cool bond markets

if they come in below expectations.