Euro area government bond yields dip before US inflation data

By Stefano Rebaudo

Jan 15 (Reuters) - Euro area benchmark Bund yields edged lower on Wednesday, breaking a 10-day rising streak, as investors awaited U.S. consumer price inflation figures later in the session.

Strong economic data and fears that U.S. President-elect Donald Trump's policies could boost inflation have driven yields up on both sides of the Atlantic since early December.

Germany's 10-year yield DE10YT=RR dropped 2 basis points (bps) to 2.60% after hitting a fresh seven-month high at 2.63%.

"The recent move higher in euro rates mainly reflects an increase in the beta to U.S. rates over the past month," JP Morgan strategist Francis Diamond said in a research note.

"We find the recent term premium repricing in German yields quite excessive and expect the cheapness to fully correct going forward and stay long 10-year Bund," he added.

Euro zone industrial production rose as expected in November but new data was unlikely to signal any major turnaround for a sector in its second year of recession.

U.S. 10-year Treasury yields US10YT=RR were down 1.5 bps to 4.77% after hitting 4.8090% on Tuesday, its highest level since Nov. 1, 2023.

"The front-end (of U.S. yields) is already fully discounting only one more Federal Reserve cut for this year, but it is especially the back-end (longer-term) of the yield where we see more upside on the back of supply and inflation pressures," said Padhraic Garvey, regional head of research Americas at ING.

"To reverse this trend we'd need to see Wednesday's CPI report surprise to the downside," he added, before flagging the core monthly inflation rate is expected at 0.3%, which "annualises to over 4% inflation."

Germany's 2-year bond yield DE2YT=RR, more sensitive to European Central Bank rate expectations, fell 2 bps to 2.3% after hitting a fresh 2-1/2-month high at 2.323%.

Money markets priced in a European Central Bank deposit facility rate at over 2.1% at the end of 2025, from 1.8% in early December EURESTECBM8X9=ICAP.

The yield spread between French and German yields DE10FR10=RR, a gauge of the risk premium investors demand to hold french debt, stood at 83 bps.

French Prime Minister Francois Bayrou on Tuesday opened the door to renegotiating a disputed pension reform in a bid to win over left-wing lawmakers whose support he needs to pass the 2025 budget. Such a move which could increase market concerns about the government's ability to curb the burgeoning public deficit.

Italy's 10-year government bond yield IT10YT=RR was down 4 bps at 3.79%, while the gap between Italian and German yields DE10IT10=RR stood at 118 bps.

(Reporting by Stefano Rebaudo; Editing by Bernadette Baum, Jacqueline Wong and Hugh Lawson)

((stefano.rebaudo@thomsonreuters.com))