German 10-year yield hits seven-week high before ECB

(Updates at 1554 GMT)

By Stefano Rebaudo

Jan 23 (Reuters) - Germany's 10-year government bond yield hit its highest level in seven weeks on Tuesday ahead of Thursday's European Central Bank (ECB) policy meeting as investors scale back bets on interest-rate cuts early this year.

A significant minority of economists in a Reuters poll, 38 of 85 (45%), said the first ECB cut would come in June. Twenty-one said April, and 23 predicted it would occur in the third quarter or beyond.

While no move on interest rates is expected this week, money markets are pricing in a very slight chance of a 25 basis points (bps) rate cut in March and around a 65% chance in April, having fully priced in such a move a week ago.

Markets are betting on around 135 bps of rate cuts by year-end from 145 bps a week ago.

According to Davide Oneglia, economist at TS Lombard "wage anxiety and risks of trade bottlenecks (due to the conflict in the Middle East) reinforce ECB hawks’ 'supply pessimism'."

Market participants label as hawks central bank officials who advocate a tight monetary policy to control inflation.

U.S. and British forces carried out a fresh round of strikes on Monday in Yemen, targeting a Houthi underground storage site.

The data calendar was light on Tuesday, and markets await HCOB's Composite Purchasing Managers' Index (PMI), compiled by S&P Global and seen as a good gauge of overall economic health, which will be released on Wednesday.

An ECB survey on Tuesday showed the euro zone's banks expect a small rebound in the demand for mortgages and loans to companies early this year as a slump in lending shows early signs of moderating.

Germany's 10-year government bond yield, the euro area's benchmark, rose 5 bps to 2.338%, its highest level since Dec. 4. It stood over 40 bps above its trough at the end of 2023, when markets ratcheted up bets on 2024 rate cuts.

Germany's 2-year bond yield, more sensitive to expectations for policy rates, was up 1.5 bps at 2.706%. It was around 35 bps above its lowest level since March 2023, hit at the end of last year.

"Short-end valuations still look ambitious in our view and probably have further to correct, but the market may want to hear new impetus from (ECB president Christine) Lagarde before the next leg lower," said Rainer Guntermann, rate strategist at Commerzbank, which forecasts the ECB to cut rates by 75 bps in 2024, starting from June.

Bond prices move inversely with yields.

Some analysts said the rise in yields in 2024 is consistent with investors closing their short positions before the end of the year and opening new ones in the first weeks of 2024.

Italy's 10-year government bond yield rose 7.5 bps to 3.915%, with the gap between Italian and German 10-year yields at 155 bps after hitting its tightest level in seven months the day before at 151 bps.

Peripheral bonds still benefit from solid demand from investors keen to lock in elevated yields that should fall as soon as the ECB reduces rates. (Reporting by Stefano Rebaudo, additional reporting by Samuel Indyk; Editing by Bernadette Baum and Mark Potter) ;))