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German 2-year yield hits two-week high

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German state inflation points to upside surprise for

national

data

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Traders trim bets on large ECB cut

(Updates at 1053 GMT)

By Samuel Indyk

LONDON, Oct 30 (Reuters) - Shorter-dated euro zone bond

yields were higher on Wednesday after quickening inflation in

five German states indicated the national rate could also rise,

denting expectations of a large European Central Bank rate cut

in December.

The national figures are due at 1300 GMT on Wednesday.

Economists polled by Reuters forecast a harmonised national

inflation rate of 2.1% in October, up from 1.8% the previous

month.

Spanish 12-month EU-harmonised inflation was in-line with

the 1.8% expected in a Reuters poll.

Germany's gross domestic product also unexpectedly increased

in the third quarter, allowing the economy to avoid a recession,

data showed on Wednesday.

"The market reaction we've seen has come from the

(German)inflation data because all the state-level readings have

been higher than the previous month," said Sophia Oertmann,

senior rates analyst at DZ Bank.

"There's now seems to be some upside risk for the national

reading."

Money markets were quick to trim bets on easing from the ECB

at December's policy meeting.

While markets are fully pricing a quarter-point cut, the

chance of an outsized 50 basis point move dropped to around 25%

from around 45% before the data was released.

Germany's two-year yield, which is sensitive to

changes in interest rate expectations, rose to a two-week high

of 2.223%. It was last up 2.5 bps to 2.194%.

Germany's 10-year yield the benchmark for the

euro zone, was down 2 bps at 2.312%.

Italy's 10-year yield was up 1.5 bp at 3.573%

after the Italian treasury sold the maximum planned amount of 9

billion euros at a bond auction on Wednesday.

The spread between Italian and German 10-year yields

widened by 3 bps to 125 bps, a function of

shifting ECB expectations, DZ Bank's Oertmann said.

Eyes were also on Britain's first budget under the new

Labour government.

Finance minister Rachel Reeves is expected to announce large

tax hikes and spending plans, while hoping to avoid triggering

the kind of bond market chaos that brought down former prime

minister Liz Truss in 2022.

Britain's 10-year gilt yield was down 9 bps at

4.227%, on track for its biggest one-day drop in two weeks.