Euro zone yields hit fresh multi-month highs before US data

By Stefano Rebaudo

Jan 10 (Reuters) - Euro area government bond yields hit fresh multi-month highs as investors awaited U.S. jobs data, which could provide clues about the Federal Reserve's monetary policy path.

Borrowing costs have risen as strong economic figures and the prospect of a spate of U.S. tariffs fuelled inflation fears on both sides of the Atlantic.

Germany's 10-year government bond yield DE10YT=RR was up 3 basis points (bps) to 2.55% after hitting 2.566%, its highest level since July 10.

"On the (U.S.) payrolls, it's averaged 180k per month through 2024 and averaged 150k per month through the last four months of 2024," said Padhraic Garvey, regional head of research Americas at ING.

"The number expected this month is within these parameters, and in consequence, we doubt that delivery of 165k (the consensus) will be dramatically impactful for Treasuries."

Markets focused also on U.S. consumer price figures due early next week.

Investors are closely watching UK government bonds, but gilt yields edged up on Friday, broadly in line with U.S. and euro zone debt, but remained well below the highs set early on Thursday.

A key market gauge of euro area long-term inflation expectations EUIL5YF5Y=R rose to 2.1288%, a fresh 2-month high, after dropping below 2% in early December.

Meanwhile, markets priced in a European Central Bank deposit facility rate at 2.15% in July 2025, from 1.95% early this year. EURESTECBM5X6=ICAP The depo rate is at 3%.

ECB policymaker Francois Villeroy made clear earlier this week that the slight increase in December's data doesn't call into question the ECB's victory over inflation and said policy rates could reach the neutral level by summer.

The neutral rate is the one at which monetary policy is neither expansionary nor contractionary.

Germany's 2-year yield DE2YT=RR, which is more sensitive to expectations for ECB rates, rose 2.5 bps to 2.25%, after hitting 2.259%, its highest since Nov. 5.

Italy's 10-year yield IT10YT=RR, the benchmark for the periphery, was up 2 bps at 3.73%, after hitting a fresh 2-month high at 3.744%. The gap between Italian and German yields DE10IT10=RR - a gauge of the premium investors demand to hold Italian debt – stood at 116.5 bps.

"While supply is a near-term risk for spreads, the markets seem positioned for at least the initial wave of supply," said Aman Bansal, rate strategist at Citi, after arguing the bank turned "directionally neutral" on peripheral spreads.

"This is evident from the largely unchanged euro zone government bond (EGB) (yield) spreads to Bunds and swaps this week despite record EGB supply," he added.

The gap between French and German bond yields DE10FR10=RR was at 83.5 bps.

(Reporting by Stefano Rebaudo, editing by Gareth Jones)

((stefano.rebaudo@tr.com))