Two-year German yields rise along with short-term rates
* Higher money market rates push up short German yields
* Germany sells 4.4 bln euros of two-year bonds
* Belgium outperforms after reduced 2014 borrowing plan
LONDON, Dec 11 (Reuters) - Two-year German yields crept higher on Wednesday, tracking a recent rise in short-term lending rates on the back of falling liquidity in money markets and as investors absorbed supply.
Overnight lending rates have been creeping higher as banks pay back long-term funding lent by the European Central bank at the height of the euro zone debt crisis.
"It's nothing to do with the credit risk of Germany. It's just expectations that liquidity will continue to disappear from the market, not only in the euro zone, but with possible tapering coming from the U.S," Alessandro Giansanti, senior rates strategy at ING.
Some in the market brought forward bets of when the Federal Reserve would begin to scale back its monetary stimulus after above-forecast U.S. jobs data last week, though the consensus remains for a March move.
Two-year German yields rose 1.2 bps to 0.21 percent, as the bond underperformed the rest of the curve.
Germany sold 4.38 billion euro of two-year bonds, drawing bids for 1.7 times the amount on offer, compared with 2.2 times in November even though yields were lower then.
Ten-year German yields were flat at 1.83 percent, having hit a seven-week high last week at 1.89 percent. Yields have held in a 1.65-1.95 percent range since the beginning of October.
"Trading activity is now slowing significantly. It's a tight range and we expect a relatively constructive tone going into the end of the year," Patrick Jacq, Europe rate strategist at BNP Paribas said, adding he saw room for yields on German 5-10-year bonds to ease slightly.
Other euro zone debt was also range-bound with investors reluctant to place big bets before the Fed's Dec. 17-18 policy meeting.
A majority of economists in a Reuters poll published on Monday still expect the Fed to start trimming its bond buying in March but the survey also showed some economists warming to the idea that it could come earlier.
A bipartisan budget deal announced in the U.S. Congress on Tuesday would remove one obstacle to tapering.
"On the surface the budget deal is a good thing because... it reduces fiscal uncertainty that comes from the U.S," Nick Stamenkovic, bond strategist at RIA Capital markets said.
"But from a markets point of view, it increases the chances that the Fed will taper sooner rather than later, particularly after November's strong employment report."
Belgian bonds outperformed other highly-rated euro zone bonds after the country said on Tuesday it planned to issue less long-term debt in 2014 than in 2013.
"That has just triggered a bit of buying," one trader said.
Ten-year Belgian yields fell 3.3 bps to 2.40 percent.
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