May 6 (Reuters) - Euro area government bond yields eased on Wednesday as oil prices slipped below $110 per barrel and markets priced in a European Central Bank deposit rate just under 2.75% by year-end amid hopes of a U.S.–Iran peace agreement.

U.S. President Donald Trump said on Tuesday he would briefly pause an operation to help escort ships through the Strait of Hormuz, citing "great progress" toward a comprehensive agreement with Iran.

Tensions around the Strait of Hormuz have fuelled inflation concerns and expectations of ECB rate hikes, lifting borrowing costs across Europe.

Germany’s 2-year yields <DE2YT=RR>, more sensitive to expectations for policy rates, fell 3.5 basis points (bps) to 2.65% on Wednesday. They reached 2.771% in late March, the highest since July 2024.

Germany’s 10-year government bond yield <DE10YT=RR>, the euro area’s benchmark, was down 3 bps at 3.04%. It reached 3.133% last week, its highest level since 2011.

Money markets priced in an ECB deposit facility rate at 2.71% in December <EURESTECBM5X6=ICAP> from the current 2% while indicating an around 85% chance of a first tightening move next month.

Italy’s 10-year government bond yields <IT10YT=RR> fell 6 bps to 3.82%.

The yield gap of Italian government bonds versus bunds <DE10IT10=RR> was at 75.5 bps. It was at 63 bps before the attack on Iran and hit 103.62 in late March, the highest level since June 2025.