UPDATE 2-German yields at six-week lows after Fed hints at less hawkish outlook

(Updates prices)

By Amanda Cooper

LONDON, Nov 24 (Reuters) - German government bond yields fell to their lowest in six weeks on Thursday, encouraged by a rally in U.S. Treasuries the day before, after minutes from the Federal Reserve's latest meeting showed policymakers were less hawkish than previously thought.

German 10-year yields were down 8 basis points on the day at 1.841% in afternoon trade having earlier fallen to 1.802%, their lowest since Oct. 4.

Markets show investors currently expect the Fed to raise rates by half a percentage point next month and for rates to peak around 5% by June, from a range of 3.75-4.00% right now.

The Fed minutes did little to alter that outlook, given that they showed a "substantial majority" of members of the Federal Open Market Committee agreed it would likely soon be appropriate to slow the pace of interest rate hikes.

"The main takeaway was the dispersion of views, which was probably a bit larger than expected, but it's difficult to read too much into the trading because it's been a really quiet week on the volume side of things," Rabobank rates strategist Lyn Graham-Taylor said.

Also offering support to government bonds were minutes from the European Central Bank's most recent policy meeting, published Thursday, in which investors saw some dovish hints even as they showed policy makers' fears that inflation may be becoming entrenched.

"At first glance, the minutes ... do not point to a pivot any time soon. However, reading between the lines, there seem to be growing recession concerns, at least with some members, which could lead to a pause in the hiking cycle in the coming months," said Carsten Brzeski, ING's global head of macro in a note.

The minutes showed a "very large majority" of policy members supported a rate hike of 75 basis points at the last meeting and that economic growth was slowing, but not by enough to bring inflation down.

The discount of 10-year German bonds to 2-year paper widened again, reaching its largest since mid-2008, reflecting investors' belief that the ECB is likely to jack up interest rates swiftly in the coming months, but not for long, as it balances protecting the economy with bringing inflation back towards its target of 2%.

The yield curve is already at its most inverted since mid-2008, sometimes perceived as a sign that investors believe recession is approaching and growth will slow.

The spread was last at -26 basis points, having widened by 46 basis points over the course of November alone - the largest monthly increase in the discount since May 2000.

The strength in core bonds flowed into peripheral debt, pushing Italian 10-year yields down by 13 basis points to 3.67%, marking a discount of 182 basis points to Bunds.

Spanish 10-year yields fell 11 basis points to 2.79% , the lowest in 10 weeks while Greek debt dropped 11 basis points to 4.05%, the lowest in 12 weeks.

A turning point for peripheral euro zone government bonds appears to be under way as more enticing yields and a European Central Bank backstop could rein in the risk premium for Southern European debt.

"We find it hard, from a strategic perspective, to rationalise the narrowing (in spreads), but from the way investors view the world, it's difficult to argue against going long unless you have a very strong reason to do otherwise," Rabobank's Graham-Taylor said.

U.S. markets, including bonds, were closed for the Thanksgiving holiday on Thursday and will observe shortened trading hours on Friday.

The benchmark 10-year Treasury note yield fell by as much as 7 basis points on Wednesday to trade around 3.687%. It has fallen by 37 basis points in November, its largest monthly drop since March 2020. (Reporting by Amanda Cooper; additional reporting by Alun John; Editing by Elaine Hardcastle, Kirsten Donovan)