Bonds rise after inflation shows signs of cooling in Spain, Germany

By Amanda Cooper and Harry Robertson

LONDON, Nov 29 (Reuters) - Euro zone government bond yields fell on Tuesday after inflation in Germany and Spain eased this month, lifting investor hopes that the worst of the region's price crisis may soon be over.

Yields, which move inversely to prices, dropped in morning trade in Europe as data showed inflation in Germany's most populous state cooled sharply in November.

Data for the whole country later showed inflation slowed to 10% year-on-year in November, below October's 10.4% reading and economists' expectations. The harmonised figure, used to compare with other European Union countries, came in at 11.3%, in line with forecasts.

Yields retraced some of their falls when the data for the country was published at 1300 GMT, as some analysts warned that the figures were affected by seasonality and that price pressures remain strong.

German 10-year yields fell as much as 12 basis points (bps) to a session low of 1.876%. They were last down 6 bps at 1.929%, while those on the two-year Schatz were 9 bps lower at 2.088%.

A preliminary reading of Spanish consumer inflation came in at 6.8% in November, below forecasts for a rise of 7.4% and down from October's 7.3% rate.

"The market is currently in a mood where it reacts more strongly to downside surprises than upside ones," Nordea strategist Jan von Gerich said. "It's clear it's the driver."

Spanish two-year yields dropped 7 bps to 2.336%, while the yield on the 10-year Bono also fell 7 bps to 2.924%.

Italian 10-year yields, meanwhile, fell 7 bps to 3.842%, leaving their premium to benchmark Bunds at 190 bps.

Italy's 10-year borrowing costs fell to their lowest in three months at auction on Tuesday. The government sold a planned 4.25 billion euros ($4.41 billion) over two bonds, one of which was a 3-billion euro 10-year issue maturing in May 2033, which fetched 3.96% - the lowest yield since August.

Energy prices, which have soared since Russia, a major natural gas supplier to Europe, invaded Ukraine in February, are up heavily year-on-year in major consuming nations such as Germany and France.

But they are down sharply from this year's peaks. German baseload power for 2023 delivery has edged up in the last couple of weeks, but is still a third of what it was in August, at the depths of the crunch.

Nonetheless, European Central Bank President Christine Lagarde said on Monday that inflation has not peaked in the euro zone, and, if anything, the risk was that it could be even higher than expected, hinting at more rate hikes.

Some economists echoed Lagarde's concerns after Germany's November inflation reading was released on Tuesday.

"Available regional data suggest that the drop in headline inflation was mainly driven by energy base effects and a drop in prices for leisure and entertainment after the Fall vacation period," Carsten Brzeski, global head of macro at ING, said in a note to clients. "Food price inflation still increased."

The ECB will meet on Dec. 15 and investors are currently split 55/45 over whether it will raise interest rates by 75 bps or by 50 bps, according to Refinitiv data. (Reporting by Amanda Cooper and Harry Robertson; Editing by William Maclean, Bernadette Baum and Arun Koyyur)