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.

The U.S. military carried out a third consecutive night of strikes against Iran on Monday as 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 <DE2YT=RR>, more sensitive to expectations for policy rates, rose 8 basis points to 2.798%, their highest since July 2024.

Money markets indicated the ECB deposit rate at 2.70% in December EURESTECBM5X6=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 4 bps at 3.11%. It reached 3.20% in mid-May, its highest level since May 2011.

Oil prices rose nearly 3% on Tuesday to their highest in four weeks, as the U.S. reimposed its naval blockade of Iran, heightening uncertainty about energy flows.

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

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 7.5 bps to 3.94%.

The yield gap of Italian government bonds versus bunds <DE10IT10=RR> was at 80 bps. It was at 63 bps before the attack on Iran and hit 103.62 in late March, the highest level since June 2025.