Euro zone yields drop as US Treasuries rally after Bessent pick

By Stefano Rebaudo

Nov 25 (Reuters) - Euro area government bond yields fell on Monday as U.S. yields dropped after President-elect Donald Trump picked fund manager Scott Bessent as U.S. Treasury secretary, who is expected to keep a leash on U.S. debt.

The selection of Bessent triggered a relief rally in U.S. Treasuries after markets fretted about a potential rebound in inflation and an increase in the federal budget deficit from Trump's economic plans, such as tax cuts and import tariffs.

On Friday, the euro area's weak purchasing manager surveys (PMI) led German 2-year yields and the euro to their lowest levels in around two years on expectations for deeper European Central Bank rate cuts.

There is still some way to go before euro zone inflation is sustainably back at 2%, but ECB policy should not remain restrictive for too long, otherwise, price growth could fall below target, chief economist Philip Lane said.

Markets priced in an ECB deposit facility rate at around 1.85% in July from 1.80% late Friday. They fully discounted a 25 basis points (bps) rate cut next month, and an around 40% chance of a 50 bps move from over 50% soon after PMI data.

Germany's 2-year government bond yields, more sensitive to expectations for the ECB policy rates - fell 2.5 bps to 1.99%, after hitting 1.979%, its lowest level since December 2022.

Germany's 10-year yield, the benchmark for the euro area, was down 3.5 bps to a fresh one-month low at 2.215.

Italy's 10-year government bond yields, the benchmark for the euro area periphery, fell 3 bps to 3.48%.

The yield gap between BTPs and Bunds - a gauge of the premium investors demand to hold Italy's debt - was unchanged at 125 bps, after Moody's completed its review but did not announce any rating action.

The gap between French and German yields widened slightly to 80.5 bps.

French far-right leader Marine Le Pen threatened last week to topple Prime Minister Michel Barnier's fragile coalition government, widening the French spread.

(Reporting by Stefano Rebaudo, Editing by Bernadette Baum)