Euro zone yields mixed after four-day rising streak

By Stefano Rebaudo

Oct 8 (Reuters) - Euro zone government bond yields were mixed on Tuesday after four days of gains on the back of a sell-off in U.S. Treasuries driven by strong U.S. data.

Bond yields move inversely with prices.

The benchmark Treasury yield dropped one basis point (bp) in London trade after topping 4% for the first time in two months on Monday, as markets bet against another jumbo U.S. rate cut after Friday's strong U.S. jobs report.

"In our minds, the selloff is unlikely to stretch too far beyond 2.25% (for Bund yields), making it the start of the 'buy-the-dip' zone," said Jamie Searle, rate strategist at Citi.

Germany's 10-year bond yield, the benchmark for the euro zone, was up 0.5 bps at 2.25%. It hit 2.26% on Monday, its highest since early September.

"That's because we still see a pull to lower yields over a 3-6 month horizon, forecasting 10-year Bunds to (hit) 1.85% in the first quarter of 2025," Citi's Searle added.

"One flag is the risk of a persistent inflation undershoot versus target as priced in harmonised index of consumer prices (HICP) forwards, even after the uptick in oil."

Oil prices fell more than $1 a barrel on Tuesday as traders took profits from a rally in the previous session that lifted the market to its highest in over a month.

Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, was last down 0.5 bps at 2.23%.

Fears of a widening conflict in the Middle East, coupled with Beijing's failure to provide more details on its massive stimulus plan, weakened equity markets and bolstered appetite for safe-haven bonds.

Israel's military said on Tuesday it had begun ground operations in southwest Lebanon.

Markets are pricing in an around 90% chance of a 25 bps rate cut by the ECB in October.

The gap between French and German 10-year yields - a gauge of the risk premium investors demand to hold France's government bonds - was last at 77.50 bps. It reached its widest since 2012, beyond 85 bps, during France's elections this summer.

France's New Popular Front, a coalition of left-wing lawmakers, filed a no-confidence motion against Prime Minister Michel Barnier's government. Still, it will only advance in the unlikely event that far-right lawmakers also back the effort.

Italy's 10-year government bond yield rose one bp to 3.58%, with the gap between Italian and German yields at 132 bps. (Reporting by Stefano Rebaudo; Editing by Mark Potter)