Euro zone bond yields rise ahead of economic data this week

*

German GDP likely to contract in 2024, stagnate in 2025 - DIHK

*

U.S. bond yields rise above 4.30% to mid-July highs

*

US interest rate options price in Republican sweep

*

U.S. job openings report due at 1400 GMT

(Updates prices)

By Medha Singh

Oct 29 (Reuters) - Euro zone government bond yields rose across the board on Tuesday, taking their cue from U.S. Treasuries as investors awaited data on domestic inflation and growth later in the week before U.S. elections on Nov. 5.

Germany's 10-year bond yield, the benchmark for the euro zone, rose 5 basis points (bps) to 2.34%, not far from a three-month high of 2.352% touched on Monday.

U.S. yields hit multi-month highs as investors continued to price in a high probability that Republican former president Donald Trump will win the race for the White House.

The selloff in bond markets began last week in tandem with U.S. Treasuries, partly reflecting investors positioning ahead of the Nov. 5 presidential vote.

Trump's proposed tariff, tax and immigration policies are seen as inflationary, which would support the dollar and put bonds under pressure, as well as slowing the pace of Federal Reserve rate cuts.

"Polls start pricing in a possibility of a Republican sweep, which several weeks ago seemed highly unlikely. And we are seeing a Treasury sell-off. That is an acknowledgement of the fact that budget deficits are expected to become a lot higher," said Sonal Desai, chief investment officer, fixed income at Franklin Templeton.

Analysts expect increased volatility heading into the U.S. elections, with the

options market

bracing for the biggest post-election swings in U.S. Treasury yields in more than 30 years.

"The increasing probability of a Republican sweep is also impacting European rates," said Danske Bank chief analyst Piet Haines Christiansen.

PIVOTAL DATA DUE

As well as the elections taking place in the world's largest economy, a host of pivotal economic data will be in the spotlight, starting with U.S. job openings later on Tuesday.

Also on investors' radar this week are a first look at third-quarter euro zone growth numbers, inflation reports out of Germany, France and the euro zone, and finally the crucial U.S. jobs report on Friday.

The German Chamber of Commerce and Industry (DIHK) on Tuesday forecast that Europe's largest economy would contract by 0.2% this year and would see zero growth next year.

The report adds to a string of data that indicates deterioration in the euro zone economy. That, coupled with comments from some European Central Bank policymakers highlighting concerns about inflation undershooting the central bank's 2% target, has fuelled bets of steeper rate cuts.

The ECB is widely expected to lower rates by at least 25 bps at its next policy meeting in December, with traders placing a 34% chance of a larger cut.

Germany's two-year bond yield, which is more sensitive to ECB rate expectations, firmed by 4 bps to 2.17%.

Elsewhere, France's 10-year yield rose 7 bps to 3.07%, while Italian yields rose 6 bps to 3.56%.

The gap between Italian and German Bunds - a gauge of the risk premium investors demand to hold Italian debt - stood at 122 bps, trading in a tight range over the past week. (Reporting by Medha Singh in Bengaluru; Editing by Kirsten Donovan and Gareth Jones)