UPDATE 2-Euro zone bond yields dip after surge, focus on supply

(Adds details, updates prices)

By Yoruk Bahceli

March 23 (Reuters) - Euro zone bond yields dipped on Wednesday after a surge earlier in the week, while the focus remained on debt issuance.

Yields rose after U.S. Federal Reserve Chairman Jerome Powell and other policymakers rattled bond investors by saying the central bank needed to move "expeditiously" to combat high inflation.

That led markets to bet on a higher probability of the Fed lifting rates by 50 rather than 25 basis points (bps) at one or more of its remaining meetings this year, sending both U.S. Treasury and euro area bond yields higher.

But on Wednesday, bond markets calmed and by 1525 GMT Germany's 10-year yield, the benchmark for the bloc, was down 1.5 basis point on the day at 0.49%

Most other 10-year bond yields were flat to a basis point lower.

It had surged 14 bps over Monday and Tuesday to the highest since 2018, while two-year yields hit their highest level since 2015 and are less than 25 bps away from turning positive.

"Purely on the bond side I think we're seeing an end to the supply-related pressure that took place as investors braced for new deals coming to the market this week," said Antoine Bouvet, senior rates strategist at ING.

A raft of syndicated debt sales, where borrowers sell the debt directly on to end investors through investment banks, have come to market this week.

On Wednesday, Italy raised 5 billion euros from a new, eight-year floating rate bond, receiving 10.7 billion euros of demand. Austria launched a 4.5 billion euro, 10-year bond that saw 26 billion euros of demand, according to lead managers.

These follow a 12 billion-euro debt sale from the European Union on Tuesday.

Sizeable debt sales tend to put pressure on outstanding bonds as investors make room for the new supply. Bond yields move inversely with prices.

Germany's finance agency also said its bond issuance plan would remain unchanged in the second quarter, despite higher defence spending after Russia's invasion of Ukraine and relief for households from surging energy prices.

Finance agency head Tammo Diemer also said that the amount German government bonds held by Russia was not known to the agency, but that he assumed they have been held by the Russian central bank in the past.

The debt agency in early March increased the outstanding amount of a two-year bond that had become difficult to deliver in the repo market as it suspected that some of the bond was held by entities sanctioned after the invasion of Ukraine.

Diemer said the operation solved the problem and that these difficulties had not arisen with other bonds.

Bouvet at ING said that comments by the European Union's budget commissioner, who pushed back against the prospect of raising new joint debt to tackle the impact of the Ukraine crisis, according to Bloomberg News, may have also pulled euro zone bond yields lower on Wednesday. (Reporting by Yoruk Bahceli, additional reporting by Rene Wagner; Editing by Alexander Smith, Alison Williams and Alex Richardson)