Euro zone yields dip slightly, spread with Treasuries stays tight

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Fed NY president says rates could fall soon

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ECB officials say the central bank needs to be vigilant

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US data might not clear the fig before Fed meeting, UBS economist says

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Moody's upgrade on Italy already priced in

By Amanda Cooper and Stefano Rebaudo

LONDON, Nov 24 (Reuters) - German government bond yields dipped modestly on Monday, still trading close to their smallest discount to Treasury yields for a month, after a top Federal Reserve official indicated a December rate cut might be on the cards, narrowing the spread.

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 0.5 basis points (bps) in early trading at 2.60% on Monday, pushing their discount to Treasuries to 134.8 bps, around the lowest in a month.

The 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.

Risk assets are rising with European shares nudging higher, after U.S. stocks rose sharply on Friday.

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.

German business morale unexpectedly fell in November, a survey showed on Monday.

With the ECB firmly on hold, the focus remained on the Federal Reserve policy path and its next meeting due on December 9 and 10.

Arend Kapteyn, economist at UBS Investment Bank, noted that the meeting would be held just a week before the Bureau of Labor Statistics intends to release both the October and November payroll reports, followed two days later by November CPI.

"The (Fed) Chair and others have cited operating in a 'fog' without official government data, but sticking to the schedule knowing that critical data is just a week away, would make that 'fog' a choice," he said.

"If the meeting does not move, the December cut becomes a close call," he added.

Italy's 10-year government bond yields were down one bp at 3.45%.

Their gap over safe-haven German Bunds -- key gauge of the extra return investors demand to hold Italian debt instead of safe-haven German bonds -- was roughly unchanged at 75 bps after Moody's on Friday granted Italy its first rating upgrade in 23 years. It hit a fresh 15-year low at 70.68 bps in mid-November. (Reporting by Amanda Cooper and Stefano Rebaudo; Editing by Andrew Cawthorne and Peter Graff)