UPDATE 2-Euro zone bond yields dip, with inflation in focus

(Updates prices)

By Harry Robertson

LONDON, March 26 (Reuters) - Euro zone government bond yields fell slightly on Tuesday, after rising the previous day, as investors waited for the first readings of March inflation data from the bloc later in the week and for U.S. price figures on Friday.

Germany's 10-year bond yield, the benchmark for the euro zone, was last down 2 basis points (bp) at 2.36%, after climbing 5 bps on Monday. Yields move inversely to prices.

Euro zone yields have fallen over the last week as central banks have talked more warmly about rate cuts, and after the Swiss National Bank lowered borrowing costs.

Yet they remain higher for the year, as economies and inflation have been somewhat slower to cool than initially expected.

"We've just been coming in going a little bit in the last the last few days," said Giles Gale, head of global inflation strategy at UBS, adding that he saw no specific driver for the moves.

Spain and France are among the euro zone economies due to publish preliminary March inflation data this week, on Wednesday and Friday respectively. Euro zone-wide numbers will be released next week.

The February data on the U.S. PCE price index, the Federal Reserve's preferred measure of inflation, is due on Friday, when most bond traders will be on holiday for Easter. It is expected to show inflation ticked up very slightly to 2.5% in February.

Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, was last 1.5 bps lower at 2.86%, after rising 6 bps on Monday.

Italy's 10-year bond yield was 3.5 bps lower at 3.66% , having risen the same amount the previous day. The closely-watched gap to Germany's 10-year yield narrowed slightly to 128 bps.

Traders expect around 90 bps of cuts from the ECB this year, up from around 85 bps in mid-March but well below the roughly 130 bps envisaged at the start of 2024.

Gale said the market expectations appeared slightly too aggressive.

"I think really in order to be talking about more than 25 bps per quarter, you're looking for a substantially more meaningful slowdown," he said.

(Reporting by Harry Robertson; Editing by Andrew Heavens, Bernadette Baum and Ed Osmond)