Nov 17 (Reuters) - German government bond yields hit their lowest in more than two months in volatile trading on Friday, as investors upped their bets on global central banks cutting rates earlier and more aggressively next year, as inflation eases and growth cools.

The sweep lower in yields was driven by U.S. Treasuries , which gained in price after recent data helped cement expectations the Federal Reserve will not raise rates again this cycle.

The derivatives market now shows investors believe the European Central Bank will have to lower rates to 3.0% by the end of next year from 4.0% now - implying 100 basis points of cuts, including 50 bps by July..

They also place a roughly 80% chance that the first 25 bp rate cut will be in April.

Germany's 10-year government bond yield, the benchmark for the euro area, ended the day roughly flat at 2.588%, having earlier fallen as far as 2.517%, its lowest since Sept. 1.

"We're still in this environment where we are late cycle and flirting with the idea of whether we go into a recession or not," Justin Onuekwusi, chief investment officer at investment firm St James's Place, said.

"This is the key reason why central bank expectations have become a key driver to risk and right now it's hard to look beyond near-term," he said.

A FRAGILE RALLY

Some market participants were sceptical about a further fall in long-dated yields.

"While being long interest rate duration risk (buying long-dated bonds) may, at first sight, appear to be a profitable business again, a more sober perspective, particularly on old-fashioned supply and demand dynamics, suggests otherwise", said Ralph Gasser, head of fixed income specialists at GAM.

"If we add that core inflation remains sticky and deflationary base effects of food and energy prices are already waning fast, breakevens, too, may be subject to upside surprises from here," he added, referring to the difference between nominal and real yields - a gauge of inflation expectations.

Germany's 2-year yield - most sensitive to short-term expectations for policy rates - hit 2.90%, its lowest since June 7. It finished 1 basis higher at 2.96%.

A key market gauge of euro area inflation expectations hit its lowest level since late March at 2.35%, in a further sign of confidence that the ECB is winning its battle against inflation.

ECB policymaker Robert Holzmann repeated on Friday that the central bank must stand ready to raise interest rates again if necessary, and said he did not expect the ECB to start cutting rates in the second quarter, as some think could be the case.

Italy's 10-year yield, the benchmark for the more indebted members of the euro zone, rose 1 bp to 4.362%, above its session trough of 4.254%, which was also the lowest since Sept 4.

The Italian bond market indicated little concern among investors about ratings agency Moody's review of Italy's long-term creditworthiness due later on Friday.

The country is rated one notch above non-investment grade, with a negative outlook since August 2022.

Most analysts expect no change to the rating and believe Italy's debt will remain investment grade in the absence of a domestic political shock.

The gap between Italian and German 10-year yields – a gauge of the premium investors demand for owning riskier euro zone bonds – hit 172.40 bps, its narrowest since Sept. 21.

(Additional reporting by Dhara Ranasinghe in London and Stefano Rebaudo in Milan Editing by David Evans, Kirsten Donovan) ;))