Euro area bond yields edge up ahead of German inflation data

By Stefano Rebaudo

Jan 31 (Reuters) - Euro zone government bond yields inched higher on Friday ahead of German inflation data as Thursday’s European Central Bank policy meeting led investors to confirm their expectations for the monetary easing path.

The ECB cut interest rates and policymakers guided for a further reduction in March as concerns over lacklustre economic growth supersede worries about persistent inflation.

Markets also await later in the session the U.S. Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's preferred measure of inflation.

Germany's 10-year bond yield DE10YT=RR, the euro area’s benchmark, rose 2 basis points (bps) to 2.54%.

Money markets priced in a 84% chance of a 25 bps ECB cut in March IRPR and a depo rate at 2.05% EURESTECBM8X9=ICAP at the end of 2025, in line with the levels seen on Thursday before the ECB statement.

Germany's two-year bond yield DE2YT=RR, more sensitive to ECB rate expectations, was up 2 bps at 2.22%.

Italy's 10-year yield IT10YT=RR was 2.5 bps lower at 3.62%. The gap between Italian and German yields DE10IT10=RR -- a market gauge of the risk premium investors demand to hold Italian debt -- was at 108 bps, not far from its lowest level since October 2021 at 104.50 bps.

The yield spread between OATs and Bunds DE10FR10=RR stood at 74.50 bps. It widened to around 90 bps, its highest since 2012, in mid-January and end-November amid fears that France would be unable to cut its growing budget deficit.