Euro zone bond yields rise as investors tone down rate-cut optimism

LONDON, Jan 9 (Reuters) - Euro zone bond yields rose on Tuesday, after dipping on Monday, as investors further rowed back on their rate-cut bets for 2024 and braced for more government debt issuance.

Yields, which move inversely to prices, have climbed in 2024 after plunging in November and December as falling inflation and a softer tone from central banks caused traders to price in big falls in borrowing costs this year.

Germany's 10-year bond yield, the benchmark for the euro zone, was last up 6 basis point (bps) at 2.179%. It dropped around 80 bps in November and December but has since risen roughly 15 bps in January.

Jussi Hiljanen, head of rates strategy at lender SEB, said he did not see a particular trigger for the rise in yields on Tuesday but said expectations about Federal Reserve and European Central Bank rate cuts have been the dominant driver.

"The trend over the past two weeks in the U.S. and Europe has been for markets to delay rate cut expectations," he said. "I don't see anything to suggest here and now that the ECB is going for a rate cut in March ... they could still do it but it's very uncertain."

Italy's 10-year bond yield was last up 7 bps at 3.872%. That pushed the closely watched spread over Germany's 10-year bond yield slightly higher to 169 bps, just below Monday's three-week high of 171 bps.

Governments issuing large amounts of debt in January has been a factor in the fall in bond prices and was in the spotlight on Tuesday.

Italy is set to issue 12 billion euros ($13.13 billion) of debt, including a tap of a 30-year bond, and Belgium 6 billion euros, analysts at Commerzbank estimated in a client note.

"Focus in EGBs (European government bonds) should be on the duration-intensive supply as primary markets face a busy schedule today," Commerzbank rates strategist Hauke Siemssen said.

Investors on Tuesday continued to temper their expectations for when the first ECB rate cut will come.

Money market pricing showed that traders think there is just over a 40% chance the first 25-bp cut will come in March, down from almost 45% on Monday and around 70% on Dec. 28.

They envisage roughly 140 bps of cuts coming this year, down from around 170 bps at one point in late December. The ECB's main interest rate is currently at 4%.

Germany's 2-year bond yield, which is sensitive to interest rate expectations, was last up 5 bps at 2.592%. ($1 = 0.9140 euros) (Reporting by Harry Robertson; Editing by Alexander Smith)