LONDON, Dec 6 (Reuters) - Euro zone government bond yields dropped for the first time in three days on Tuesday, after two European Central Bank officials signalled inflation and rates may be close to peaking in the run-up to a raft of major central bank decisions.
The ECB, the U.S. Federal Reserve and the Bank of England all meet next week to discuss monetary policy.
Many investors hope they will slow down the pace of interest rate increases, raising by 50 basis points (bps) instead of 75 bps in a sign the hikes may be over in the coming months.
Europe's bond market received a boost on Tuesday after ECB chief economist Philip Lane told the Milano Finanza daily he believed the peak in inflation was probably close, although more rate hikes would be necessary to bring price pressures down.
"We do expect that more rate increases will be necessary, but a lot has been done already," the paper quoted Lane as saying.
Elsewhere, ECB Governing Council member Constantinos Herodotou told a Bloomberg event that euro zone rates will rise again, but were very near their "neutral level".
Benchmark 10-year German Bunds were last yielding 1.796%, down 8 bps on the day, while the two-year Schatz yield also edged down 8 bps to 2.043%. Yields move inversely to prices.
The gap between the two, known as the yield curve, stood at 25 bps - around its most negative in 30 years, having flipped below zero in early November.
A 2% yield on 10-year Bunds is "a bit too optimistic" given that the ECB will almost certainly give some kind of steer on how it plans to unload the longer-dated bonds on its balance sheet, said Pooja Kumra, senior European rates strategist at TD Securities.
"We do like holding a short bias in Bunds from here," she said.
Italian 10-year BTP yields were down 7 bps at 3.674%, while 10-year Spanish yields also fell 7 bps to 2.803%.
Investors widely expect a 50-bps rise in the ECB's 1.5% deposit rate on Dec. 15 before a string of further moves in 2023 that could carry the rate to near 3%. The ECB has already raised rates by a total of 200 bps this year.
"We expect a 50 bps hike but one more 75-bps hike is possible before the ECB downshifts," Deutsche Bank strategists, led by economist Mark Wall, said.
"If we think of the ECB as being in a cycling race, (it) is leaving the easy, flat terrain of the valley," they said.
"The precise altitude of the finish is not known. Before settling into the climb, the ECB will need to downshift to a more sustainable speed."
Societe Generale said it expects the 10-year German Bund yield to rise sharply back to 2.5% in the first quarter as the ECB begins to let its bond holdings mature, reducing support for the market. (Reporting by Amanda Cooper and Harry Robertson, additional reporting by Dhara Ranasinghe; Editing by Crispian Balmer and Arun Koyyur)
