Nov 27 (Reuters) - Euro zone government bond yields fell on Monday, with investors awaiting inflation data due later this week that could influence expectations for interest rate cuts in 2024.
Germany's 10-year government bond yield dropped 9 basis points (bps) to 2.56%. On Friday, it hit 2.663%, its highest level in 10 days as the rally in bonds since early October's Bund yield peak of 3.024% paused for breath during the U.S. holiday.
Bond yields move inversely to prices.
"It's hard to pin down today’s move to any concrete event – it is basically retracing the Thanksgiving move while the U.S. was off," said Benjamin Schroeder senior rates strategist at ING.
"Overall, I still have the feeling the market is looking for the next triggers. The German budget situation could add to bullish sentiment but it’s an evolving story, (and) we have the improving inflation backdrop that could be confirmed by this week’s data with both the euro zone flash CPIs and the PCE in the US."
Euro zone inflation data and the U.S. personal consumption expenditure index - the Federal Reserve's preferred inflation gauge - are both due Thursday, though some national European data is due earlier, including Germany's on Wednesday.
Germany's ruling coalition unveiled a supplementary budget on Monday that will temporarily lift a self-imposed cap on borrowing after a constitutional court ruling tore up the government's spending plans.
Some analysts reckoned that easier fiscal rules in Germany could lead to a European agreement more focused on growth than on stability, as Italian Prime Minister Giorgia Meloni urged.
Also in the mix were remarks from European Central Bank president Christine Lagarde who said euro zone inflation pressures were easing as expected but it was too early to "start declaring victory".
She said the ECB may soon discuss whether to end reinvestments early in its 1.7 trillion euro Pandemic Emergency Purchase Programme.
Money markets are currently pricing in around 90 bps of rate cuts by December 2024 down from 100 bps in mid-November, while pricing around a two-thirds chance of a first 25 bps rate cut in April from about a 90% chance ten days ago.
Markets scaled back their bets on policy rate reductions last week as European Central Bank (ECB) policymakers warned about "too optimistic" bets on future cuts.
"We advise investors to hold their nerve as the outlook for monetary policy continues to move," said Mark Haefele, chief investment officer at UBS Global Wealth Management.
"While recent data suggests that inflation is falling faster than expected, disappointments remain possible and central bankers are eager to stress their commitment to hitting their targets," he added.
Some analysts see an economic slowdown in 2024 that will lead ECB policymakers to ease monetary policy aggressively.
Deutsche Bank said the euro area "was on course for nearly two years of stagnation by mid-2024" and "the ECB will likely cut 100 bps from June to year-end 2024."
Italy's 10-year government bond yield, the benchmark for the euro area's periphery, fell 8.5 bps to 4.32%.
The spread between Italian and German 10-year bond yields - a gauge of premium investors ask to hold debt of the bloc's most indebted countries – was at 174 bps. It hit 169.5 bps last week, its tightest since Sept. 21.
Shorter dated yields also fell. Germany's two year yield was down 7 bps at 3.00% and Italy's two year yield was down 9 bps at 3.58%. (Reporting by Stefano Rebaudo Editing by Toby Chopra, Mark Potter and Christina Fincher) ;))
