LONDON, Dec 4 (Reuters) - Euro zone government bond yields hit fresh multi-month lows on Monday as market bets on interest rate cuts ramped up following economic data and comments from European and U.S. policymakers last week.
Greece's 10-year yield fell to its lowest since August 2022 after Fitch upgraded the country's credit rating to investment grade, following a similar move by S&P Global in October.
Bloomberg quoted European Central Bank rate setter Francois Villeroy de Galhau saying at a conference on Friday that barring any shock, rate hikes were now over, adding that the central bank may consider cutting interest rates next year as the process of disinflation had been "faster than expected".
Euro zone inflation eased to 2.4% in November from 2.9% in October, data showed last week, prompting bets that the ECB will begin cutting interest rates sooner than previously thought.
Germany's budget crisis has dealt another blow to an already battered economy, the president of the ZEW economic research institute said on Monday.
ECB euro short-term rate (ESTR) forwards price almost 140 basis points of rate cuts by end-2024, from around 90 basis points at the start of last week.
Markets are also pricing in around an 85% chance that the ECB will begin cutting interest rates in March , from around a 40% chance a week ago.
"Central banks are coming down from rate hikes and that risk is being priced out," said Anders Svendsen, chief analyst at Nordea. "If you think there's a very low risk of rate hikes, then you need to position for lower rates."
Germany's 10-year yield, the euro area's benchmark, was last down 4.5 bps at 2.318%, having dropped to 2.313% earlier, its lowest since July 19.
Germany's policy-sensitive 2-year yield was 2 bps lower at 2.64%, its lowest since May 16.
Policymakers have tried to pour cold water on easing expectations with ECB Vice-President Luis De Guindos and German rate setter Joachim Nagel both saying it was too early to declare victory over inflation.
Markets are also pricing in rate cuts from the Federal Reserve early next year even as Chair Jerome Powell on Friday said the central bank was prepared to tighten policy further if appropriate.
Powell added that the risks of slowing the economy more than necessary have become "more balanced", reaffirming the central bank's intent to be cautious but also offering fresh optimism on progress so far.
"Even though Powell tried to keep rate hikes on the table, I don't think he was very convincing. The markets didn't buy it," Nordea's Svendsen said.
Greek bonds outperformed after Fitch's move, with the ratings agency citing the sharp downward trend in general government debt.
Fitch raised Greece's sovereign rating to 'BBB-' from 'BB+' with a stable outlook, making Greece's bonds eligible for a wide range of bond indexes that require investment grade ratings from multiple agencies.
Its 10-year government bond yield dropped 12.5 bps to 3.564%, its lowest level since August 2022.
"This paves the way for Greece to rejoin the major sovereign bond indices in January," said Commerzbank rates strategist Rainer Guntermann in a note.
Italy's 10-year yield, the benchmark for the euro zone's periphery, fell 3 bps to 4.07%, its lowest level since July 27.
The spread between the German and Italian 10-year yields was at 175 basis points. (Reporting by Samuel Indyk and Stefano Rebaudo; Editing by Kirsten Donovan, Alison Williams and Emelia Sithole-Matarise)