Euro zone government bond yields edge up as rate volatility drops

By Stefano Rebaudo

Sept 25 (Reuters) - Euro zone government bond yields edged up on Thursday as rates volatility continues to ease with the European Central Bank expected to remain on hold until the end of 2026.

Germany’s 10-year government bond yield DE10YT=RR, the benchmark for the bloc, rose 1 basis point to 2.76% after dropping 0.5 bp the day before.

Markets have recently strengthened their expectations for the ECB to keep policy rates higher for longer.

Traders priced in a 40% chance of a rate cut by July EURESTECBM7X8=ICAP which would bring the depo rate to 1.75%. The key rate is seen at 1.97% in December 2026. EURESTECBM11X12=ICAP

Consumer sentiment in Germany is set to improve slightly heading into October, while remaining in negative territory.

U.S. Treasuries were roughly unchanged in early London trade with the 10-year yields US10YT=RR flat at 4.15%.

Germany’s 2-year yields DE2YT=RR, more sensitive to expectations for ECB policy rates, were flat at 2.02%.

The yield gap between safe-haven Bunds and 10-year French government bonds DE10FR10=RR — a market gauge of the risk premium investors demand to hold French debt — was stable around 82 bps. France's OAT yields rose one bp to 3.58%.

French unions will hold another day of strike and protests on October 2 to put pressure on Prime Minister Sebastien Lecornu over their demands to scrap his predecessor's austerity programme.

Italy’s 10-year government bond yields IT10YT=RR were up 1.5 bps at 3.61%. The yield gap versus safe-haven Bunds DE10IT10=RR was at 84.5 bps. It dropped below 80 bps, its lowest since 2010, in mid-August.