Updates latest prices

By Stefano Rebaudo and Lucy Raitano

June 5 (Reuters) - Euro zone government bond yields ticked higher on Friday for their first weekly rise since mid-May, as investors grew more cautious about the prospects for a swift U.S.-Iran deal to reopen the Strait of Hormuz and also digested some strong U.S. jobs data.

Iran has reaffirmed support for its Lebanese ally Hezbollah and demanded that Israel withdraw from southern Lebanon, underscoring complications facing an interim deal to end the broader conflict between the U.S. and Iran.

Reopening the Strait of Hormuz would ease energy-driven inflation pressures and reduce expectations of further central bank rate hikes, pushing bond yields lower.

Germany's two-year yields <DE2YT=RR>, more sensitive to expectations for policy rates, rose 3.3 basis points to 2.68%, heading for a 16 bps rise this week. They reached 2.771% in late March, the highest since July 2024.

Money markets are pricing a European Central Bank deposit rate of around 2.65% by December EURESTECBM5X6=ICAP, implying two 25-bp hikes and a 60% chance of a third move. They also see more than a 90% chance of a first rate rise this month, followed by another in September.

Germany's 10-year government bond yield <DE10YT=RR>, the euro zone benchmark, was up 1 bps at 3.03% and on track for a 11-bp weekly rise. It reached 3.13% in late March, its highest since June 2011.

US DATA IN FOCUS

A hotly-anticipated U.S. employment report showed the U.S. economy posted a third straight month of strong job gains in May, confirming the labor market was gaining traction after stumbling last year.

The figures give the Federal Reserve more room to keep interest rates unchanged amid rising inflation due to the war in the Middle East.

U.S. treasury yields rose while German 2-year yields ticked slightly higher after the release.

Markets have for weeks priced out a Fed rate cut this year and now assign roughly a 50% probability to a hike in December, according to the CME Group’s FedWatch tool.

Attention remains on next week's ECB policy meeting, with investors watching for signals about the future path of rates.

“The fiscal backdrop is far less supportive than during the 2022 energy crisis, limiting amplifications of inflation by fiscal policy,” said Rune Thyge Johansen, euro zone economist at Danske Bank, flagging expectations for two hikes this year and a reversal in 2027.

“While German fiscal policy remains expansionary and defence spending is rising, consolidation efforts in France and several Southern European countries leave the aggregate euro area fiscal stance broadly neutral,” he added.

Italy's 10-year government bond yield <IT10YT=RR> rose 1.5 bps at 3.8%, with the yield gap over German bunds <DE10IT10=RR> at 74 bps.