Euro zone yields rise after German states inflation data

By Stefano Rebaudo

Sept 30 (Reuters) - Euro zone government bond yields rose on Monday after economic data led investors to slightly scale back their bets on future European Central Bank monetary easing moves.

Inflation eased across a raft of key German states in September, preliminary data showed on Monday.

Germany will release national data later in the session, a day before euro zone figures.

Data showed the Italy consumer price increase slowed to 0.8% year-on-year in September.

Germany's 10-year bond yield, the benchmark for the euro zone bloc, rose 3.5 basis points (bps) to 2.17%; it was down 0.5 bps before the German figures.

"The German data suggest that any decline in services inflation, which the ECB has been paying particular attention to, could be small and mainly driven by the reversal of the boost from the Paris Olympics," said Franziska Palmas, senior Europe economist at Capital Economics.

Palmas reckoned that the German state data and figures for France and Spain suggest that euro-zone headline inflation will drop to 1.7% from 2.2%.

Data showed on Friday that French and Spanish consumer prices rose less than anticipated in September, leading investors to increase their bets on future ECB rate cuts. Figures from the euro area are due on Tuesday.

Markets priced in 49 bps of rate cuts by the European Central Bank by year-end from around 53 bps before data.

"With no significant dovish signals from data, markets are inclined to slightly reduce their bets on future ECB rate cuts after recent big moves," said Massimiliano Maxia, fixed income specialist at Allianz Global Investors.

Germany's two-year bond yield, which is sensitive to ECB rate expectations, was up 3.5 bps at 2.12%. It hit 2.046% earlier in the session, its lowest level since December 2022.

The gap between Austrian and German 10-year yields - a gauge of the risk premium investors demand to hold Austria's government bonds - was roughly unchanged at 49 bps after the far-right won the parliamentary elections.

The Eurosceptic, Russia-friendly Freedom Party (FPO) gained 28.8% of the vote, but leaders of Austrian political parties united to reject the idea of forming a coalition with FPO.

The gap between French and German 10-year yields was at 79 bps. It reached its widest since 2012, beyond 85 bps during France's parliamentary elections.

France's new Prime Minister Michel Barnier is considering a temporary increase in corporate tax as part of efforts to plug a gaping hole in public finances, Le Monde newspaper reported.

Italy's 10-year yield rose 5 bps to 3.51%, and the gap between Italian and German yields widened to 133 bps. (Reporting by Stefano Rebaudo; Editing by Muralikumar Anantharaman)