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Benchmark Bund yields on track for biggest biweekly fall since mid-March

(Adds comments from BlueBay CIO, background)

By Stefano Rebaudo

Dec 8 (Reuters) - Euro area's benchmark 10-year Bund yield was on track to record its biggest biweekly fall since mid-March as money markets ramped up bets on future European Central Bank rate cuts amid weak economic data and less hawkish remarks from policymakers.

In mid-March, bond yields tumbled as the collapse of Silicon Valley Bank (SVB) sent investors rushing into safe-haven assets.

Money markets were pricing around 90 basis points (bps) of European Central Bank rate reduction in 2024 on Nov. 28 before U.S. Federal Reserve Governor Christopher Waller nodded to possible rate cuts in a matter of months.

They increased their bets to 110 bps the day after as data showed German inflation fell to a weaker-than-expected 2.3%.

Comments from Fed Chair Jerome Powell, ECB rate setters Francois Villeroy de Galhau and Isabel Schnabel along with weak economic data, led market bets to approach 150 bps on Wednesday.

December 2024 ECB euro short-term rate forwards were last at 2.51%, implying market expectations for 139 bps of rate cuts.

However, some analysts remain sceptical about the repricing of the policy path.

"The recent decline in inflation is much less remarkable than may appear to be the case," said Mark Dowding, BlueBay CIO, RBC BlueBay Asset Management, who forecasts the first ECB rate cut in the second half of 2024.

"Base effects have pulled the consumer price index (CPI) lower, but we are now likely to see this head back up again over the next few months, as these factors drop out of calculations."

Germany's 10-year government bond yield rose 4.5 basis points to 2.24% on Friday. It hit the day before 2.166%, its lowest level since April 6.

It was also on track to end the last two weeks with a 42 bps drop, the biggest since mid-March. Barring the mid-March fall, the Bund yield was set to record its biggest biweekly drop in more than 12 years, since end-July 2011.

Investors await U.S. data later in the session, which can deliver further clues about the Fed policy path, while Japan's 10-year government bond yield hit a three-week high overnight on growing speculation that the Bank of Japan (BOJ) would end its negative rate policy soon.

"Our economists are looking for a modest upside surprise in the (U.S.) payrolls, which argues for a continuation of the consolidation (of euro zone bonds after the recent rally)," said Michael Leister, head of the rate strategy at Commerzbank.

Japanese investors are large holders of foreign bonds, and some analysts have said a sharp rise in domestic yields could suck money back to Japan and out of global assets.

Italy's 10-year sovereign bond yields, the benchmark for the euro area's periphery, rose 6.5 bps to 4.02%.

Investors will closely watch negotiations over the new European Union fiscal rules – the Stability and Growth Pact (SGP) -- as the resilience of peripheral spreads could be in danger if investors already nervous about debt sustainability and high rates are spooked by tight post-pandemic budget rules.

France, Germany and the EU executive expressed hope on Friday that EU governments would reach an agreement.

Time is pressing because the new rules have to get the approval of the current European Parliament which will dissolve in April before European elections in June, with some analysts expecting a final agreement in second half of 2024.

(Reporting by Stefano Rebaudo, editing by Angus MacSwan and David Evans) ;))

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