Euro zone yields hold steady at 2-month highs as inflation jumps

Updates in midday European trading

By Greta Rosen Fondahn

Jan 7 (Reuters) - Euro area bond yields traded around their highest in about two months on Tuesday, while figures from the euro zone showed inflation accelerated in December, as expected.

Inflation in the 20 nations sharing the euro picked up to 2.4% last month from 2.2% in November, Eurostat said on Tuesday, lifted by more expensive energy and stubbornly high services costs.

This was in line with expectations in a Reuters poll of economists.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, was up one basis point (bp) at 2.466%, hovering close to its highest in two months.

Yields move inversely to prices.

Inflation expectations also rose among euro zone consumers in November, a separate survey showed on Tuesday, while Monday's indicator showed a faster-than-expected pickup in German inflation.

This week's inflation data will be the last before the European Central Bank's next meeting on Jan. 30.

The jump in inflation has not shifted near-term bets on rate cuts right now and traders price in one 25-bp cut at the January meeting, but it could complicate a kick-start of euro zone growth.

"A fall in inflation below the ECB target appears unlikely in the first half of the year," said Commerzbank economist Vincent Stamer.

"We do expect the ECB to make four more interest rate cuts this year. But the monetary authorities could act more cautiously in the future despite the weak economy in the euro zone."

The ECB aims for 2% inflation.

Markets currently expect the ECB to cut interest rates by around 100 bps this year 0#EURIRPR.

Germany's two-year bond yield DE2YT=RR, which is more sensitive to changes in ECB rate expectations, fell one bp to 2.192%, after touching 2.214% on Monday, its highest in two months.

The euro zone economy ended 2024 in a fragile state, according to a survey on Monday. Overall activity contracted for a second straight month in December, as a modest recovery in the services industry failed to offset a deeper downturn in manufacturing.

The ECB opened the door to more easing at its last policy meeting in December, on the back of an uncertain economic outlook, while the threat of U.S. tariffs also weighs on growth prospects.

Still, ECB President Christine Lagarde warned at the time that domestic inflation remained uncomfortably high.

Italy's 10-year yield IT10YT=RR was up 2 bps at 3.602%, close to its highest level in seven weeks, and the gap between Italian and German yields DE10IT10=RR widened 1.5 bps to 112.6 bps.

Also in the focus of investors on Tuesday are U.S. JOLTS job opening data and the Institute for Supply Management's services index for December, published later in the session.

(Reporting by Greta Rosen Fondahn, additional reporting by Tristan Veyet; Editing by Amanda Cooper, William Maclean)

((Greta.RosenFondahn@thomsonreuters.com))