Market News

(Adds U.S. data)

By Harry Robertson

LONDON, Oct 17 (Reuters) - Euro zone bond yields picked up on Tuesday as investors moved out of safe-haven assets and the focus returned to growth, inflation and central bank policy.

Forecast-beating U.S. retail sales data fuelled a further bond sell-off on both sides of the Atlantic, with Treasury 10-year yields up 10.5 basis points (bps) to 4.81%.

Germany's 10-year yield was last up 7 bps at 2.85%, after rising 5 bps on Monday. Yields rise as bond prices fall, and vice versa.

Italian bond prices rose more sharply, with the yield on the country's 10-year bond up 11 bps at 4.87%.

"Yields are rising in general because U.S. yields are rising, and they have been rising for the last couple of days. That's pulling us along," said Peter Schaffrik, head of interest rate strategy at RBC Capital Markets.

U.S. and European bond yields hit their highest in more than a decade at the start of October as central bankers stressed they will hold interest rates at high levels until inflation is conquered, before falling as geopolitical concerns came to the fore.

Schaffrik said investors were now selling bonds again after buying them for their safe-haven properties in the wake of Palestinian militant group Hamas' attack on Israel.

"Some of that is reversing now, and some of that underlying story that was around beforehand - economy too strong, wages still rising - hasn't gone away."

Christoph Rieger, head of rates and credit research at Commerzbank, said weak demand for government debt sales was weighing on the bond market.

An auction of 20-year Japanese bonds was met with a lukewarm response, days after an auction of 30-year U.S. bonds received poor demand. Yet Germany received strong bids when it sold 4 billion euros ($4.2 billion) of shorter-dated bonds on Tuesday.

Survey data from Germany showed that investor morale brightened more than expected in October, suggesting respondents expect growth to improve over the next six months.

European Central Bank (ECB) chief economist Philip Lane said in an interview published on Monday that there was "quite some distance" to cover before rate cuts were on the agenda. The ECB sets interest rates next week, after raising its key policy rate to 4% in September.

Germany's 2-year bond yield, which is sensitive to expectations about ECB interest rates, was up 5 bps at 3.20%.

The rise in Italian yields widened the gap between Italy's and Germany's 10-year bond yields slightly to 200 bps.

The spread is seen as a sign of investor sentiment towards the euro zone's more indebted countries and hit its highest since January earlier this month at 209 bps.

($1 = 0.9472 euros) (Reporting by Harry Robertson, additional reporting by Stefano Rebaudo; Editing by Deborah Kyvrikosaios and Jan Harvey)