(Updates prices)

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

higher 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 2 basis points

to 3.163% and was little changed across the week.

The United States on Thursday said it could maintain a naval

blockade of Iran indefinitely amid floundering ceasefire talks.

U.S. President Donald Trump has repeatedly asserted that the

U.S. has "total control" over the strait, prompting Iranian

counterclaims that the waterway is under Tehran's management.

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

its conditions are met. These include removing economic

sanctions and releasing frozen Iranian assets.

Despite the lack of progress on talks, 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 0.2% on Friday to $87.20 a barrel.

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

to European Central Bank rate expectations, rose 1 bp to 2.772%

and was set to end the week 3 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.