UPDATE 1-German 10-year yield hits highest in over five months

Updates prices

By Samuel Indyk

LONDON, Jan 8 (Reuters) - Germany's 10-year Bund yield rose slightly on Wednesday to a more than five-month high, supported by accelerating euro zone inflation, elevated bond supply and strong U.S. data.

Inflation in the euro zone reached 2.4% last month after 2.2% in November, data showed on Tuesday, although analysts said that was unlikely to derail the chances of a rate cut from the European Central Bank later this month.

Markets are pricing about 24 basis points (bps) of easing from the ECB at January's meeting, implying about a 96% chance of a quarter-point cut.

But traders have trimmed expectations for future rate cuts over the last month and are now pricing around 92 bps of easing in 2025, implying three 25-bp moves and almost a 70% chance of a fourth.

"The repricing of the ECB policy path has been an important driver (of higher bond yields)," said Jussi Hiljanen, chief rates strategist at SEB.

Germany's 10-year yield DE10YT=RR, the euro zone benchmark, was last up 2 bps on the day at 2.51%, after hitting 2.53%, its highest since July last year. Bond yields move inversely to prices.

Germany's policy-sensitive two-year yield DE2YT=RR was down 0.5 bps at 2.20%, just below the two-month high of 2.214% reached on Monday.

Europe's bond markets are having to absorb heavy issuance to start the year, with Germany selling 5 billion euros of 10-year Bunds and Italy set to sell new 10-year and 20-year green bonds via syndication on Wednesday.

"January faces heavy supply which can weigh on fixed income," wrote Jefferies economist Mohit Kumar in a note.

Analysts at UniCredit expect euro zone debt agencies to sell a total of 135 billion euros of bonds this month, roughly 10% of the total expected in 2025.

Italy's 10-year yield IT10YT=RR rose 3 bps to 3.67%, pushing the spread between Italian and German 10-year yields DE10IT10=RR slightly tighter to 112 bps.

Better than expected U.S. data on Tuesday has also pushed yields higher this week, with services sector activity accelerating and job openings exceeding forecasts.

Attention was now turning to Wednesday's release of the minutes from the Federal Reserve's December meeting, where the central bank lowered rates by 25 bps but signalled a slower pace of rate cuts ahead.

(Reporting by Samuel Indyk. Editing by Ros Russell and Mark Potter)

((Samuel.Indyk@thomsonreuters.com;))