Adds comments, background

By Stefano Rebaudo

July 14 (Reuters) - Germany's policy-sensitive two-year bond yield hit its highest since July 2024 on Tuesday as the Middle East conflict stoked fears that higher energy prices could boost inflation and interest rates.

Iran fired ballistic missiles at a U.S. air base in Jordan on Tuesday and the United States attacked Iranian targets for five hours in a battle for control of the Strait of Hormuz that has pushed up oil prices to four-week highs.

Germany's 2-year yields <DE2YT=RR>, more sensitive to expectations for policy rates, rose 5 basis points (bps) to 2.77%, after reaching 2.7985%, their highest level since July 2024.

Money markets indicated the European Central Bank deposit rate at 2.68% in December EURESTECBM4X5=ICAP, from the current 2.25%. They also fully priced a rate hike in September.

Germany's 10-year government bond yield <DE10YT=RR>, the euro area's benchmark, was up 2.5 bps at 3.10%. It reached 3.20% in mid-May, its highest level since May 2011.

Investors will watch Federal Reserve Chair Kevin Warsh's testimony before the House Financial Services Committee and U.S. inflation data due later in the session.

"We maintain our view that the Fed will stay on the sidelines for the rest of the year, although developments on the inflation side are both key to our view and quite uncertain," David Tam, U.S. rates strategist at BNY, said.

"The inflation data this week, including producer price index later in the week, will help firm up views one way or another, but we warn the data will be volatile going forward, and very likely the markets along with them," he added, after recalling oil prices fell sharply in June.

The crucial number will be the increase in the core index as the headline inflation will be affected by lower energy prices.

The U.S. central bank may need to raise interest rates "in the near term" if coming data show inflation continuing well above the 2% target, Fed Governor Christopher Waller said on Monday.

Italy's 10-year government bond yields <IT10YT=RR> rose 5.5 bps to 3.92%, after reaching 3.9441%, their highest since May 20.

The gap versus Bunds <DE10IT10=RR> was at 80 bps. It was at 63 bps before the beginning of the conflict and hit 103.62 in late March, the highest level since June 2025.

The French spread widened recently with investors watching domestic politics and fiscal plans as the country is at risk of missing its deficit-reduction target this year.

The yield gap versus Bunds DE10FR10=RR was at 80.50 bps, after hitting 84 bps last week, its highest level since October 2025.