Euro zone bond yields fall to multi-month lows after ECB's Schnabel turns dovish

(Updates at 1612 GMT)

By Harry Robertson

LONDON, Dec 5 (Reuters) - Euro zone bond yields fell to new multi-month lows on Tuesday after European Central Bank official Isabel Schnabel told Reuters further interest hikes are "rather unlikely", after a marked slowdown in inflation in November.

The move lower in yields got a second boost after U.S. labour market data, which showed U.S. job openings fell to their lowest level in more than 2-1/2 years, the strongest sign yet that the labour market was cooling.

Germany's 10-year bond yield fell 11 basis points (bps) to 2.238%, its lowest since mid-May, with numerous analysts attributing the drop to Schnabel's comments.

Schnabel said she had shifted from her previously hawkish stance after three unexpectedly benign inflation readings in a row. November's figure showed inflation slowed to 2.4% year-on-year, near the ECB's 2% target and down sharply from more than 10% a year earlier.

"The most recent inflation number has made a further rate increase rather unlikely," Schnabel said, although she cautioned against declaring victory "prematurely".

Germany's 2-year bond yield, which is sensitive to ECB rate expectations, fell 7.5 bps to 2.602%, its lowest since mid-May. It was last down 6.5 bps at 2.612%.

Schnabel's comments had a "massive impact", said Jussi Hiljanen, head of European rates strategy at lender SEB, noting the German official was one of the most influential policymakers on the ECB's Governing Council.

"The hawks are clearly turning more dovish," he said. "I would say it's almost impossible now to push back against the rate cut expectations."

On Tuesday, traders in euro zone money markets reckoned there was almost a 90% chance of a 25-bp cut coming in March, up from around 70% the previous day.

They now envisage over 145 bps of cuts by the end of December, compared to just over 100 bps a week ago.

"We think it's probably over-done," said Lyn Graham-Taylor, rates strategist at Rabobank, of the market's pricing of rate cuts. "We'd be nervous about anticipating pricing in any more."

Italy's 10-year bond yield was last down 12.5 bps to 3.985%, its lowest since mid-July. The gap between Italian and German 10-year yields narrowed to 173.4 bps.

The gap between Greek and German 10-year bond yields , a gauge of the risk premium investors demand to hold Greek debt, also narrowed to its tightest since October 2021 at 105.7 basis points.

Ratings agency Fitch on Friday upgraded Greece's credit rating to investment grade, making Greek bonds eligible for a wide range of bond indexes.

Meanwhile, the yield on Britain's 10-year bond fell 18 bps to 4.005%, its lowest since May. The rate-sensitive 2-year yield fell 12 bps to 4.448%.

On the data front, figures released by the ECB showed that consumer expectations for inflation over the next 12 months held steady at 4% in October.

The ECB will set interest rates on Thursday next week and is all but certain to leave them at the current record high of 4%. The Federal Reserve and Bank of England are also likely to hold rates steady next Wednesday and Thursday respectively.

(Reporting by Harry Robertson and Alun John; Editing by Amanda Cooper, Sharon Singleton and Christina Fincher)