May 25 (Reuters) - Euro zone government bond yields fell

on Monday as renewed hopes of a U.S.-Iran deal to reopen the

Strait of Hormuz eased concerns over inflation and reduced

expectations of aggressive central bank policy tightening.

Borrowing costs tracked moves in oil prices, which slid 5%

amid optimism over a resolution of the conflict, even as key

sticking points remained unresolved.

The United States will either have a good agreement with

Iran or deal with the country "another way," Secretary of State

Marco Rubio said on Monday.

Money markets priced in a European Central Bank depo rate at

2.57% in December from 2.67% late Friday, from the current 2%.

They indicated an 70% chance of a first

rise next month from 80%.

"It is unclear whether by mid-June there will be enough

clarity and certainty around any potential deal to call off a

(ECB) rate hike," said Benjamin Schroeder, senior rate

strategist at ING.

"There is good reason for caution around the need for

further tightening," he argued.

Schroeder noted Europe would benefit the most from a swift

resolution to the disruption in the Strait of Hormuz, adding

that the region's broader macroeconomic environment remains

fragile.

Germany's 2-year yields, more sensitive to

expectations for policy rates, fell 7 basis points (bps) to

2.5671, their lowest since May 7%. They reached 2.771% in late

March, the highest since July 2024.

Germany's 10-year government bond yield, the

euro area's benchmark, was down 5 bps at 2.9831%, its lowest

since May 7. It reached 3.13% in late March, its highest level

since June 2011.

Italy's 10-year government bond yields fell 6.5

bps to 3.70%.

The yield gap of Italian government bonds versus Bunds

was at 71 bps. It was at 63 bps before the attack

on Iran and hit 103.62 in late March, the highest level since

June 2025.