* Markets price in a first ECB hike in July, fewer than

two moves fully priced in 2026

* German 2-year yields fall to one-month lows

* Macquarie says a 'nuclear concession' is crucial

(Adds comment, background)

By Stefano Rebaudo

April 17 (Reuters) - Euro zone short-dated government

bond yields dropped sharply to one-month lows on Friday after

Iran's foreign minister said that passage for all commercial

vessels through the Strait of Hormuz was open for the remaining

period of the ceasefire.

Meanwhile, money markets scaled back bets on future European

Central Bank rate hikes, fully pricing the first move in July,

from June earlier in the session.

They now assign less than a 5% chance of a rate rise at this

month's meeting, down from 15%. Markets also see the ECB's

deposit facility rate at 2.40% by year-end,

compared with 2.55%. The depo rate is currently at 2%.

Oil prices plunged more than 10%, easing inflation fears

that had gripped bond markets since early March, when the Middle

East conflict erupted and prompted traders to price in a tighter

policy response from the ECB.

Two-year German Schatz yields, the most sensitive

to shifts in expectations for rates and inflation, fell 12 basis

points to 2.40%, their lowest level since mid-March. They

reached their highest since last July in late March, at around

2.77%.

"The Strait of Hormuz is the key risk. If the ceasefire

holds and the reopening is seen as lasting, markets could also

strip out ECB rate hike pricing altogether," said Massimiliano

Maxia, fixed income specialist at Allianz Global Investors.

"But, whatever happens, what (ECB) President (Christine)

Lagarde says after the next policy meeting will be crucial for

rate expectations."

Iranian Foreign Minister Araqchi said in a post on X the

Strait was open for the remainder of the U.S.-brokered 10-day

truce between Israeli forces and Iran-backed Hezbollah agreed

between Israel and Lebanon.

U.S. President Donald Trump said on Friday that the naval

blockade on Iran will "remain in full force" until a deal with

Tehran is struck.

Germany's 10-year government bond yields, the

euro area's benchmark, dropped 8.5 bps to 2.95%.

"A return to the status quo ante bellum with regard to the

nukes (Iran's nuclear programme) would be politically damaging

to the President at home, and more damaging, we think, than

ending the War without that major concession," said Thierry

Wizman, global forex and rates strategist at Macquarie Group.

"That's why we continue to look for the 'nuclear concession'

to verify that the War is really moving toward being over."

One of the key sticking points has been over Tehran's

nuclear ambitions, with the U.S. proposing at last weekend's

talks a 20-year suspension of all Iranian nuclear activity.

Tehran suggested a halt of three to five years, according to

people familiar with the proposals.

Italy's 10-year government bond yields fell 15

bps to 3.66%, after reaching 4.142% in late March, the highest

since July 2024.

The yield gap of Italian government bonds versus Bunds was

at 69 bps. It was at 63 bps before the attack against Iran and

hit 103.62 during the conflict, the highest since June 20, 2025.