Euro zone yields steady after German inflation, fiscal plans in focus

By Stefano Rebaudo and Samuel Indyk

June 30 (Reuters) - Euro zone government bond yields were steady on Monday as investors slightly increased bets on European Central Bank rate cuts after benign inflation data from Germany, while global debt sustainability concerns remained in focus.

Inflation eased in the euro zone's largest economy in June, falling to 2% year-on-year. Analysts polled by Reuters had forecast EU-harmonised inflation increasing from the previous month to 2.2%.

Italian EU-harmonised consumer prices (HICP) readings were also slightly below a median forecast.

"Inflation in the euro zone is benign," said Salomon Fiedler, economist at Berenberg.

"Absent any shocks, the ECB can thus maintain its deposit rate at 2.0%."

Germany's 10-year yield DE10YT=RR, the euro area’s benchmark, was little changed at 2.595%.

Germany's two-year yield DE2YT=RR, which is more sensitive to changes in monetary policy expectations, was down 1 basis point at 1.855%.

Money market traders marginally increased bets on ECB easing following the German data. Futures implied an ECB deposit rate at 1.74% in December from 1.76% before the inflation figures.

ECB chief Christine Lagarde is scheduled to speak at 1900 GMT at the ECB's annual conference in Sintra, Portugal.

Germany's 30-year yield DE30YT=RR was up one bp at 3.104%, after hitting 3.119% last week, its highest level since May 26.

The German yield curve steepened last week, with the spread between 10-year and 2-year yields DE2DE10=RR recording the first weekly rise in a month.

The curve steepened as markets priced in an ECB terminal rate roughly unchanged at around 1.75–1.80%, while yields on longer maturities rose amid expectations of a significant increase in German fiscal spending.

German lawmakers passed a multi-billion-euro package to support companies and boost investment.

Citi expects most euro zone bond spreads to tighten against German Bunds by year-end, led by Spanish Bonos and Italian BTPs, with target levels at 50 and 75 basis points respectively.

Citi argued that the "view finds support from the front-loaded German fiscal stimulus announced last week," and that "the increased NATO target for defence spending is a fiscal risk" for Italy and Spain.

Italy's 10-year yield IT10YT=RR fell 1 bp to 3.498%, with the spread between BTPs and Bund yields at 90 bps. It hit 84.20 bps earlier this month, its lowest since March 2015.

Fiscal spending remained in focus in the U.S., with Senate Republicans attempting to pass President Donald Trump's tax-cut and spending bill that is expected to add $3.3 trillion to the nation's debt pile.

U.S. Treasury Secretary Scott Bessent said on Monday he was confident that the bill will progress in the coming hours.

Trade talks are also in the spotlight after Canada scrapped its digital services tax targeting U.S. technology firms in a bid to advance stalled trade negotiations with the U.S.