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German yields hover around two-month highs on upbeat U.S. outlook

By Ana Nicolaci da Costa

LONDON, Dec 23 (Reuters) - German bond yields traded around two-month highs on Monday as an increasingly upbeat U.S. economic outlook underpinned riskier European shares at the expense of safe-haven bonds.

The International Monetary Fund predicts the U.S. economy would expand at a faster pace next year, given positive economic data and some signs of compromise in Congress, the head of the Washington-based lender said on Sunday.

The comments come after an upward revision to U.S. growth data on Friday underpinned the view that the Federal Reserve's decision to scale back its asset-buying programme was justified.

Against this backdrop, investors would look at a U.S. personal consumption data later, including a gauge of inflation, to assess the pace of stimulus withdrawal.

"You would expect to see some upward pressure on German yields if we were to continue to see surprises such as (the growth data) coming from the U.S.," Chris Clark, rates strategist at ICAP, said.

"The market is expecting a fairly robust personal income report. This would tie into the generally upbeat picture that we have been seeing in the U.S. recently."

German Bund futures fell 10 ticks to 139.82, pushing 10-year yields up 1 basis point to 1.88 percent.

They touched 1.903 percent earlier - not far from Friday's 1.906 percent, which was the highest since mid-October.

Other euro zone debt was also slightly lower, with some lower-rated bonds underperforming into year-end after the good run they have had this year.

Ten-year Italian yields were 2.2 bps higher at 4.15 percent and Spanish equivalent were 1.8 bps higher at 4.17 percent.

The 10-year yield gap between Italian and German bonds have narrowed 56 basis points so far this year to 227 bps, while the Spanish equivalent is down 130 bps on the year at 229 bps.

Traders said the moves were exaggerated as liquidity thinned into the Christmas holidays and end of the year.

"We are at about 10 percent of normal volume, 10 percent of an average day," one trader said.