Jan 11 (Reuters) - Benchmark Bund yields edged lower on Thursday after hitting a fresh one-month high following hawkish comments from central bank officials on both sides of the Atlantic, in cautious markets ahead of U.S. inflation data later in the session.
Federal Reserve Bank of New York President John Williams said late on Wednesday that it's too soon to call for rate cuts as the central bank still has some distance to get inflation back to its 2% target.
Meanwhile, European Central Bank (ECB) board member Isabel Schnabel said the ECB would keep key policy rates at restrictive levels until it's confident that inflation will sustainably return to its 2% target.
Germany's 10-year government bond yield, the benchmark for the euro area, was down 2 basis points (bps) at 2.19%, after hitting its highest level since Dec. 13 at 2.215% in early trading.
"Euro zone government bonds remain in a weak spot with short-end Bunds underperforming as ambitious rate cuts are increasingly challenged and priced out," said Hauke Siemssen, rate strategist at Commerzbank.
Bond prices move inversely to yields.
"Front-end weakness was fuelled by the hawkish tilts in Schnabel's remarks," he added.
Money market bets reflect around a 40% chance of the ECB cutting rates in March, and around 135 bps of easing in 2024.
According to a Reuters poll, the U.S. core consumer price index is expected to remain at 0.3% in December from the month before, while year-on-year inflation is seen at 3.8% from November's 4%.
"Most of the falls from 9% towards 3% have come from base effects. The last bit, the bit to come, is tougher," said Padhraic Garvey, regional head of research Americas at ING.
"We expect it (inflation) will (fall). But we need to be shown the money, as does the market," he added.
"The Fed will need that too. Hence, the rationale for the market to pare back the rate cut expectations that had built through the fourth quarter of 2023."
Most of January's government bond supply has been well received with limited impact on borrowing costs, while some analysts flagged that geopolitical risks could affect inflation concerns and put pressure on bond prices.
"2024 will likely be another challenging year (for bond supply), even if it has started with the usual early-year bumper supply meeting with bumper demand," Citi analysts said.
Some analysts said the market perception that yields are at their highest levels in 2024 boosted bond demand.
Italy's 10-year government bond yield, the benchmark for the euro area periphery, dropped 2.5 bps to 3.82%.
The gap between Italian and German 10-year yields was at 160 bps, its lowest level in 2024. (Reporting by Stefano Rebaudo Editing by Mark Potter) ;))
