July 14 (Reuters) - Germany's policy-sensitive two-year bond

yield hit its highest in almost two months on Tuesday, as the

Middle East conflict stoked fears that higher energy prices

could boost inflation and interest rates.

The U.S. military carried out a third consecutive night of

strikes against Iran on Monday, after President Donald Trump

reinstated a blockade of Iranian shipping and proposed charging

a 20% fee to guard the Strait of Hormuz.

Germany's 2-year yields, which are more sensitive to

expectations for policy rates, rose 2.5 basis points (bps) to

2.7489%, their highest since May 19.

Money markets implied an ECB deposit rate at 2.70 % by

December, from the current 2.25%. They also

fully priced a rate hike in September.

Germany's 10-year government bond yield, the euro

area's benchmark, was up 0.5 bps at 3.08%.