(Adds comments, background)

By Stefano Rebaudo

June 8 (Reuters) - Euro zone government bond yields dropped

from multi-week highs on Monday after Iran announced the end of

its military operations against Israel.

Investors were still cautious about the possibility of a

swift reopening of the Strait of Hormuz, which would ease energy

supply constraints, lowering inflation pressures while reducing

expectations of further monetary tightening and pulling bond

yields lower.

Germany's 2-year yields, more sensitive to

expectations for policy rates, were down 0.5 basis points (bps)

to 2.68%, after hitting 2.734% early in the session, the highest

since May 20. They reached 2.771% in late March, the highest

since July 2024.

Money markets are pricing the ECB deposit rate at 2.69% by

December, from the current 2%. They also

priced in over a 90% chance of a first rate rise this month,

followed by a second in September.

Investors are bracing for the ECB policy meeting later this

week, where a 25-bp rate increase is widely anticipated.

"The data currently available is indeed insufficient to

assess the magnitude or persistence of the shock from the Middle

East conflict, while higher input costs are not being fully

passed through to final prices and demand pressure remains

weak," Alessia Berardi, head of global macroeconomics at the

Amundi Investment Institute, said.

"Our projections currently rule out a return to lower rates

in 2027 following the mild hikes we expect for 2026, as we see

the core consumer price index (CPI) remaining around 2.5%," she

added.

Amundi Investment Institute expects a 25-bp precautionary

hike in June, to be replicated in the third quarter of this

year, conditional on data release.

Germany's 10-year government bond yield, the

euro area's benchmark, was flat at 3.04%, after hitting 3.072%,

the highest since May 22. It reached 3.13% in late March, its

highest level since June 2011.

"With renewed clashes in the Middle East and higher oil

prices, 10-year Bund yields are unlikely to fall below the 3%

mark for the time being," Rainer Guntermann, rate strategist at

Commerzbank, said.

Italy's 10-year government bond yield was

roughly unchanged at 3.81%. The yield gap of Italian government

bonds versus bunds was at 75 bps. It was at 63 bps

on February 27 just before the outbreak of the Iran war and hit

103.62 in late March, the highest level since June 2025.