UPDATE 1-German 10-year yield below 0% as traders pare back rate hike bets

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By Yoruk Bahceli

Jan 20 (Reuters) - Benchmark German bond yields fell for the first time in five sessions on Thursday as money markets slightly pulled back their bets on rate hikes this year.

Germany's 10-year yield, the benchmark for the euro area, had risen above 0% for the first time in nearly three years on Wednesday but was trading back in negative territory on Thursday.

Money markets pared back bets on rate hikes from the European Central Bank this year slightly, pricing in a 80% chance of 10-basis point rate hike by September, down from a 100% chance on Wednesday.

The chance of a second 10 bps rate hike by December 2022 fell to 60%, from 100% on Wednesday.

"We think there are good reasons there will be a bit of a double-take on the recent yield increases," said Lyn Graham-Taylor, senior rates strategist at Rabobank in London.

"It might be some people taking the opportunity of the recent sell-off for more attractive buying."

Euro zone bond yields have surged and markets have ramped up bets on ECB rate hikes in January, mainly following moves in the United States, even as ECB projections and policymakers suggest it is unlikely to raise rates this year.

Investors are betting the Federal Reserve will hike rates four times this year starting in March and the bank may also start winding down its $8 trillion-plus balance sheet.

After rising as high as 0.025% on Wednesday, Germany's 10-year yield was down nearly 3 basis points to -0.04% by 1319 GMT.

Other 10-year benchmark government bond yields in the bloc were also down 2-3 bps on the day.

Yields extended their fall slightly after the ECB's December meeting minutes showed that policymakers saw a risk that inflation could get stuck above target and argued that the bank should be equally open to tightening or easing policy.

ECB President Christine Lagarde, who has also said the bank is ready to take any measures necessary to bring inflation down, maintained on Thursday that inflation would decrease gradually over the course of the year.

An exception to Thursday's fall in yields was Greece, where the 10-year yield was last up 3 basis points to 1.73%, a new high since May 2020, following the country's 10-year government bond sale on Wednesday.

The deal saw far less demand than last year as the end of the ECB's pandemic emergency bond purchases looms in March.

Elsewhere, France and Spain were in the primary market with auctions.

($1 = 0.8805 euros) (Reporting by Yoruk Bahceli; Editing by Susan Fenton and Pravin Char)

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