Euro zone yields dip; Bunds advantage over Treasuries shrinks

LONDON, Nov 24 (Reuters) - German government bond yields dipped modestly in early trading on Monday, but still traded close to their smallest discount to Treasury yields in a month, after a top Federal Reserve official indicated a December rate cut might be on the cards, which gave U.S. debt prices a boost late last week. New York Fed president John Williams said on Friday rates "could fall in the near term", which prompted traders to rapidly price in the possibility of a drop in December, driving Treasury yields to a three-week low.

Benchmark 10-year Bund yields, which ended last week not far off six-week highs, were down 1 basis point in early trading at 2.688% on Monday, pushing their discount to Treasuries to 136.4 bps, almost at its smallest since late October.

This gap was closer to 156 bps just three months ago, but it has narrowed as investors have priced in just a slim chance of the European Central Bank cutting rates again in the coming 12 months, and a growing possibility of the Fed cutting repeatedly in 2026.

The smaller discount reflects the 20-bp fall in Treasury yields since late August, while those on Bunds have barely moved.

The renewed prospect of a series of Fed rate cuts injected a note of optimism into risk assets like stocks on Monday, which would, in theory, draw capital away from safe-havens like bonds. On the euro zone monetary policy front, ECB officials Madis Muller and Martin Kocher told a panel discussion on Friday the central bank expects inflation to remain around its 2% target rate for the time being, while still calling for vigilance.

"While the ECB remains on hold, we believe the macro outlook, though weak, has not deteriorated enough to justify a change in its communication or policy stance. The minutes should offer an updated perspective on how the Governing Council views the balance of risks around the economic outlook," Jefferies economists said in a note. A survey of German business confidence is due later in the morning on Monday. The Ifo institute's monthly index of business climate index is expected to rise to 88.5 this month, from 88.4 in October. (Reporting by Amanda Cooper; Editing by Andrew Cawthorne)