(Updates pricing in European afternoon)

By Stefano Rebaudo

Aug 10 (Reuters) - Euro zone government bond yields rose on

Monday as oil prices climbed, with investors monitoring

prospects for the reopening of the Strait of Hormuz and awaiting

U.S. inflation data later this week.

Investors remained cautious about the prospects for a Hormuz

deal after Iran reiterated that the United States must meet

other conditions, including compensation and the lifting of

sanctions and military threats.

Brent crude futures were last up around 2.7% at $85.79

per barrel.

German 2-year bond yields, which are more sensitive

to interest rate expectations, rose 5.2 basis points to 2.78%.

They reached 2.8938% on July 23, their highest in more than two

years.

Germany's 10-year bond yield was up 4.6 bps at

3.18%. It hit 3.2118% in July, its highest since May 2011.

Borrowing costs had posted the biggest weekly fall since June on

Friday as hopes of an Iran peace deal and weak U.S. data

tempered market expectations for central banks' monetary

tightening.

Analysts at Citi highlighted that Friday's bullish U.S.

payrolls data wasn't enough to push Bund yields out of the

3.1-3.2% range that has held for a month.

"One reason might be that Bunds are primarily now being

driven by the natural gas price given its importance for

inflationary pressure into the winter and therefore ECB hikes,"

they said.

Natural gas prices followed a similar path to

Brent crude futures but did not approach the record levels seen

after Russia's 2022 invasion of Ukraine, even as oil prices

returned to comparable highs.

Money markets priced in a rise in the European Central Bank

deposit rate to around 2.7% by the end of the year, with a

further increase to roughly 2.8% in March 2027, from the current

2.25%.

Weak July jobs data on Friday led markets to scale back

expectations of a Fed rate hike next month, though economists

still see a case for tighter policy.

"A benign CPI could help ease fears about Fed Chair Kevin Warsh

turning the central bank overly dovish, which should also bring

longer rates lower too," Michiel Tukker, rate strategist at ING,

said. U.S. inflation data is due on Wednesday.

U.S. 30-year Treasury yields hit 19-year highs at the end of

July after mixed signals from Fed Chair Kevin Warsh clouded the

policy outlook and fuelled inflation concerns.

The yield gap between 10-year Italian government bonds and

German Bunds was at 76.5 bps. It was at 63 bps in

February before the start of the Iran war and reached 103.62 bps

in late March, the widest since June 2025.