Nov 21 (Reuters) - Euro zone sovereign bond investors were on hold on Tuesday as European Central Bank officials pushed back against expectations for interest rate cuts in early 2024.
ECB policymaker Pablo Hernandez de Cos said late 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.
Market bets on policy rates priced in last week up to 100 basis points of reduction in 2024 with an 80% chance of a first cut in April, after U.S. data suggested the fight against inflation could be over soon.
ECB euro short-term rate forwards were pricing in around a 60% chance of a 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 4 basis points (bps) to 2.58% after rising 3 bps the day before.
Oil prices supported expectations for the disinflation process to continue in the medium term. They fell on Tuesday as investors turned cautious ahead of a meeting of OPEC+ when the producer group may discuss deepening supply cuts.
The German government is considering whether to suspend a constitutionally enshrined debt brake as a way out of the spending crunch in a move that 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 58.7 bps after falling the day before to 57.3 bps, the lowest since July 28.
Italian spread was at 172 bps after hitting a fresh 2-month low at 170 bps earlier in the session.
Markets also await U.S. Federal Reserve policy meeting minutes due out later in the day.
"Such language (of Fed minutes) is unlikely to be hawkish enough to move Fed pricing," said Aman Bansal, European rates strategist at Citi in a research note.
"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, Editing by Bernadette Baum) ;))
