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Euro zone bonds surge to best month in over a year as inflation drops

(Updates after euro zone inflation data)

By Harry Robertson

LONDON, Nov 30 (Reuters) - Euro zone bond prices held on to recent gains on Thursday as inflation data came in lower than expected, putting them on track for the biggest monthly gain in well over a year.

Data on Thursday showed that euro zone inflation slowed to 2.4% year on year in November from 2.9% in October, well below expectations of a fall to 2.7%.

Separate figures on Thursday showed that German unemployment rose in November and the French economy contracted in the third quarter, bolstering investors' bets that the European Central Bank will cut interest rates in early 2024.

Germany's 10-year bond yield, the benchmark for the bloc, fell 1 basis point (bp) to 2.417%. Yields move inversely to prices.

The yield was on track for its biggest monthly drop since July 2022, at 40 bps, reflecting the strong rally in prices.

An index of European government bonds has risen more than 3% in November, in the biggest monthly rise in a year and a half.

The weaker inflation and economic data caused traders on Thursday to bet that the first ECB interest rate cut will have arrived by April. They had previously seen a roughly 70% to 90% chance of such a move.

"Policymakers won’t want to declare victory prematurely and are sure to reiterate at December’s ECB meeting that it is far too early to cut rates," said Andrew Kenningham, chief Europe economist at Capital Economics.

"Nonetheless, with headline and core inflation likely to trend down in the new year it will hard for the ECB to ignore the extent to which the inflationary tide is turning."

Italy's 10-year bond yield was last up 1 bp at 4.192%. It was on track to fall 53 bps in November, its biggest monthly drop since the middle of 2019.

Germany's 2-year bond yield, which is sensitive to ECB interest rate expectations, was last down 4 bps at 2.779%, around its lowest since early June.

Euro zone yields have fallen sharply through the week as inflation data from individual countries has come in lower than expected, and after Federal Reserve official Christopher Waller on Tuesday suggested that U.S. rate cuts could be coming in early 2024.

(Reporting by Harry Robertson; Editing by Emelia Sithole-Matarise and Christina Fincher)

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