Euro zone yields slip as investors weigh rate outlook

By Stefano Rebaudo

Dec 5 (Reuters) - Euro zone government bond yields edged lower but with no clear direction on Monday as investors balanced expectations for a slowdown in central banks' monetary tightening path against Friday's U.S. jobs data which fuelled inflation fears.

Analysts said the focus would be on comments from European Central Bank officials in the next few days, which might fine-tune the market view on rates. The ECB pre-meeting blackout period starts on Thursday.

Germany's 10-year government bond yield DE10YT=RR , the benchmark of the bloc, was down 2 basis points (bps) at 1.83%. It hit its lowest since Sept. 19 on Friday at 1.76% before closing at around 1.85%.

Money markets price in a rate hike of around 50 bps at the ECB's Dec. 15 policy meeting. EUESTECBF=ICAP

U.S. employers hired more workers than expected in November and increased wages, shrugging off worries of a recession.

"The reaction to nonfarm payrolls on Friday is quite indicative of how strong demand currently is and suggests that the bar for investors to take profit on the rally is currently high," Unicredit analysts said in a research note.

The ECB should raise interest rates by 50 bps on Dec. 15, French central bank chief Francois Villeroy de Galhau said on Sunday, reinforcing expectations for the ECB to slow the pace of monetary tightening after back-to-back 75 bp hikes.

Governing council member Gabriel Makhlouf stressed the rates would have to move into "restrictive territory" next year.

Analysts also flagged that Villeroy de Galhau and Bundesbank President Joachim Nagel said in a joint interview with German TV that the ECB was determined to "bring inflation back to 2% by the end of 2024 or 2025."

Investor morale in the euro zone rose this month to its highest level since June, according to data from Sentix's index.

"For some more dovish ECB members that are anxious about sparking a recession, the (Sentix) data this morning may provide them with the reassurance to vote for 75bp as we are forecasting," said George Moran, economist at Nomura.

France's government bonds showed little impact from a rating agency downgrade, with the 10-year yield FR10YT=RR falling 2 bps to 2.29%.

S&P Global cut France's outlook to "negative" from "stable" on Friday, reflecting its view of rising risks to the country's public finances and the resulting fiscal space reduction.

Germany's yield curve was not far off its deepest inversion since 1992. The gap between the 2-year and 10-year government bond yields DE2DE10=RR was at -27.5 bps. Last Thursday, it hit -31.1 bps, the widest negative gap since October 1992.

Analysts said an inversion suggested that investors expect the ECB to pause its rate hikes or even cut them next year as inflation will start declining faster than expected or because the central bank wants to avoid deepening a recession.
Reporting by Stefano Rebaudo, editing by Susan Fenton and Bernadette Baum

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