July 20 (Reuters) - German two-year government bond yields

climbed to a two-year high on Monday as rising oil prices driven

by the Iran conflict reinforced expectations that the European

Central Bank will deliver two additional rate hikes by early

2027.

Brent oil prices climbed 3% to more than $90 per barrel, as

escalating U.S.-Iran hostilities restricted oil shipments

through the Strait of Hormuz.

Germany's 2-year yields, more sensitive to

expectations for policy rates, rose 2 basis points (bps) to

2.79%, after reaching 2.8174%, their highest level since July

2024.

Money markets indicated the ECB deposit rate at 2.69% in

December and 2.77% in February 2027

, from the current 2.25%. They also fully

priced a rate hike in September.

Analysts flagged that the tight correlation between oil

prices and the euro front-end, a dynamic that dominated market

moves throughout March, April and May, has resurfaced in recent

trading.

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

area's benchmark, was up 2 bps at 3.15%. It reached 3.20% in

mid-May, its highest level since May 2011.

Market participants continued to expect the ECB to leave

interest rates unchanged at its policy meeting later this week.

"Despite the resurfacing tensions in the Middle East and rising

oil prices, these remain somewhat below the June baseline

assumptions and signs of second-round effects remain limited,"

said Giada Giani, an economist at Citi.

Italy's 10-year government bond yields rose 3.5 bps

to 3.83%.

The yield gap between Italian government bonds and bunds

was at 82 bps, its highest level since early May.

It was at 63 bps in February before the attack on Iran and hit

103.62 in late March, the widest since June 2025.