Germany's bond yields edge lower as ECB officials push back on rate cut bets
(Updates prices, adds quote)
By Stefano Rebaudo and Joice Alves
Nov 21 (Reuters) - Germany's sovereign bond yields edged lower on Tuesday, but remained off a more than a two-month low hit last week, after European Central Bank (ECB) officials pushed back against expectations for interest rate cuts in early 2024.
ECB policymaker Pablo Hernandez de Cos said on Monday it was "premature" to talk about rate cuts, while Francois Villeroy de Galhau argued that rates have reached a plateau where they will likely remain for the next few quarters.
But investors are pricing in that global central banks will cut rates earlier and more aggressively next year.
ECB euro short-term rate forwards were pricing in around a 60% chance of a 25 basis point (bps) rate cut in April next year and a cumulative 90 bps by year-end.
Germany's 10-year government bond yield, the benchmark for the euro area, dropped 5.3 basis points (bps) to 2.6% after rising 3 bps the day before.
"The ECB regrets that it did not foresee the inflation shock of 2022 and responded to it belatedly. Now, seeming to doubt its own projections or models," said Bruno Cavalier, chief economist at Oddo BHF.
The central bank maintains an overly restrictive monetary policy stance as it underestimates the downside risks to inflation and activity, he added.
"The ECB now appears to have many more reasons for cutting rates than the Fed."
The weaker-than-expected euro zone economic growth in the third quarter pointed to struggles across the region, while oil prices' fall on Tuesday supported expectations for the disinflation process to continue in the medium term.
In Germany, the government imposed a freeze on most new spending commitments as Chancellor Olaf Scholz's coalition struggled to find a way out of a deepening budget crisis.
The ruling has strained Scholz's coalition over whether to suspend limits on raising new debt, a move which could increase the Bund supply.
"However, changes will be tough to agree with the (the fiscally conservative Free Democrats) FDP and the opposition, and (German Economy Minister Robert) Habeck reportedly does not see a majority at present," said Rainer Guntermann, rate strategist at Commerzbank.
Yield spreads between Portuguese and Italian government bonds versus Bunds tightened slightly after Moody's improved its view of the two countries during the weekend.
The Portuguese spread was at 61 bps after falling the day before to 57.3 bps, the lowest since July 28.
The Italian spread was at 174 bps after hitting a fresh two-month low at 170 bps earlier in the session.
Markets are also awaiting U.S. Federal Reserve policy meeting minutes due out at 1900 GMT, with markets betting the central bank is likely done with interest rate hikes.
Aman Bansal, European rates strategist at Citi said in a research note the minutes will unlikely be hawkish enough to move Fed pricing.
"This should limit implications for Treasuries, which our U.S. rates colleagues expect to continue moving lower on better-than-expected CPI, continued fall in oil prices, and gradually building momentum," he added.
(Reporting by Stefano Rebaudo and Joice Alves; Editing by Bernadette Baum and Jonathan Oatis) ;))