LONDON, Jan 9 (Reuters) - Euro zone government bond yields rose on Monday after falling sharply the previous week, as investors scrutinised economic data for hints about the path of interest rates.
Germany's 10-year yield, seen as a benchmark for the currency bloc, was up 5 basis points (bps) to 2.261% in morning trading in Europe.
The yield on the bond dropped more than 35 bps last week in its biggest weekly fall since 2011, driven by the release of data which showed euro zone inflation cooled more sharply than expected in December. Yields move inversely to prices.
However, investors remain nervous about signs that inflationary pressures are stronger than the European Central Bank (ECB) would like. Core inflation, which strips out volatile food and energy prices, rose in the year to the end of December, last week's data showed.
New data on Monday showed that Germany's industrial production rose more than expected in November.
"The recent slump in gas prices should help energy-intensive firms, but the drag on output from past rate hikes and slowing demand is likely to intensify in the coming months," said Franziska Palmas, senior Europe economist at Capital Economics.
Euro zone bond yields surged in 2022 as the ECB rapidly hiked interest rates from -0.5% in July to 2% in December and signalled it was far from finished. Higher rates cause investors to demand higher returns on bonds, pushing yields up and prices down.
However, yields have since fallen sharply again, with slowing inflation driving hopes that the ECB might soon stop raising rates.
Italy's 10-year yield was up 8 bps on Monday to 4.293%, after falling 48 bps the previous week.
The closely watched gap between Germany and Italy's 10-year yields was little changed at 202 bps.
Germany's 2-year yield, which is highly sensitive to interest rate expectations, rose 4 bps to 2.627%.
With little in the way of European data this week, investors looked towards U.S. inflation data for December, due out on Thursday. The new figures will feed into the decision making by the all-important U.S. Federal Reserve.
Investors will also keep an eye on bond issuance from euro zone countries, which are increasing their borrowing this year to support their slowing economies.
Analysts at UniCredit said Italy, Spain, Germany, Austria and the Netherlands are likely to sell a total of 25 billion euros ($26.74 billion) in bonds via auction this week. ($1 = 0.9350 euros) (Reporting by Harry Robertson, editing by Ed Osmond)
