LONDON, May 28 (Reuters) - Euro zone bond yields rose on

Thursday after the U.S. and Iran traded strikes, threatening

their ceasefire agreement and pushing oil prices up around 3%.

Germany's 10-year bond yield rose 2 basis points

(bps) to 3.005%.

The two-year German bond yield, which is more

sensitive to European Central Bank interest rate expectations,

rose 4 bps to 2.617%. Yields move inversely to prices.

The U.S. carried out what a Washington official said were

strikes on an Iranian drone operation near the Strait of Hormuz,

after President Donald Trump rejected a report he was close to a

compromise deal with Tehran.

In response, Iran's Revolutionary Guard targeted a U.S.

airbase on Thursday.

"Markets remain wary in the face of headlines from Iran as

renewed strikes overnight render an imminent deal less likely,"

said Rainer Guntermann, rates strategist at Commerzbank.

"Negative headlines leave markets in limbo, preventing

sustained relief dynamics."

Brent crude oil rose 2.5% to $96.65 a barrel.

Money markets increased their bets on rate hikes and were

last pricing in just under 65 bps of tightening from the ECB

this year, up from under 60 bps late on Wednesday.