LONDON, Dec 28 (Reuters) - Germany's two-year bond yield hit the lowest level since the March banking crisis on Thursday as traders maintained their bets for swift interest rate cuts, but longer-dated borrowing costs rose led by Italy.
The two-year yield, sensitive to interest rate expectations, dropped to 2.372%, its lowest since March 24 when global banking turmoil had markets betting that central banks would refrain from raising rates further.
It was last down 3 basis points (bps) on the day, set for its sixth straight daily decline. Bond yields move inversely to prices.
"The main driving force behind the moves is expectations for rate cuts from the major central banks," said Amanda Sundström, fixed income and FX strategist at SEB.
"Things have been moving quite quickly and I think it will continue until we get new data at the beginning of the year."
Money markets have been quick to add to expectations for rate cuts as inflation has fallen more quickly than forecast.
Traders are now pricing around a 70% chance that the European Central Bank will begin cutting interest rates at its March meeting, while over 165 basis points of easing is priced for next year.
ECB policymakers have attempted to push back on those expectations but with limited success as headline consumer price inflation in the euro zone came in lower than expectations for the third straight month in November, challenging the narrative that interest rates would remain high through 2024.
On Thursday, ECB policymaker Robert Holzmann, among the bank's most hawkish, said it was too early to talk about lowering borrowing costs and such a move in 2024 is anything but certain, Bloomberg News reported.
Longer-dated borrowing costs rose on Thursday, with Germany's 10-year yield, the benchmark for the euro area, last up 4 bps to 1.93%.
In Italy, the 10-year yield rose more than 10 bps to 3.60%, coming off 3.468%, the lowest since August 2022 touched on Wednesday. Still, having posted a big rally in recent weeks, it was down 63 bps in December, set for the biggest monthly fall since 2013.
That pushed the spread between Italy and Germany's 10-year yields wider to around 165 bps, the highest in over a week.
Similarly, Spanish and Portuguese yields were 7-8 bps higher.
Meanwhile, Britain's 10-year gilt yield briefly touched its lowest level since April 6 at 3.433%. It was last up 6 bps at 3.49%. (Reporting by Samuel Indyk, additional reporting by Yoruk Bahceli, Editing by Angus MacSwan and Sharon Singleton)
