Euro zone bond yields edge down ahead of US inflation data

By Canan Sevgili

LONDON, Sept 26 (Reuters) - Euro zone government bond yields edged down on Friday as investors turned their focus to the release of the Federal Reserve's preferred inflation gauge later in the day.

Upbeat U.S. economic data on Thursday triggered a selloff in Treasuries, pushing the benchmark 10-year yield US10YT=RR up nearly 5 basis points to 4.1950% — its highest in three weeks, as traders scaled back their bets on a rate cut from the Fed next month.

By Friday, Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, was down 1.3 basis points at 2.7588%, having ended Thursday's session up 2.5 bps. The 10-year Treasury yield US10YT=RR was steady at 4.1736%, while the 30-year yield US30YT=RR was down 0.8 bps at 4.7448%.

The personal consumption expenditures (PCE) price index, due later on Friday, is expected to provide a clearer steer on the Fed's policy outlook.

"Today's fundamental focus will be on the US (core) PCE numbers. The potential for surprises seems limited," said Commerzbank in a note.

German Chancellor Friedrich Merz is advocating for the European Union to unlock up to 140 billion euros ($164 billion) in frozen Russian assets to finance Ukraine's war effort, marking the first public expression of support at this level from Germany for such a move.

The proposal of an interest-free EU loan, outlined in a Financial Times editorial, aims to provide long-term support for Ukraine without violating property rights.

Commerzbank said the plan did not specify how the funds would be raised, noting that Russian assets cannot be confiscated.

"The obvious solution is more joint EU issuance, initially backed by voluntary bilateral guarantees from participating EU member states, and later by the EU budget," Commerzbank said.

Commerzbank added that for EU spreads, unless funding needed to be raised very quickly, the move could be positive, as net funding would still decline after 2026, while the EU could establish itself as a more permanent issuer over the longer term.

In Europe, French unions are planning fresh protests on October 2 to pressure new Prime Minister Sebastien Lecornu into shelving a fiscal austerity programme.

France's 10-year yield FR10YT=RR was down 1.8 bps at 3.5858%, leaving the gap between German and French yields — a closely watched risk premium — wider at 82.66 bps.

Italy's 10-year bond yield IT10YT=RR was also down 1.8 bps at 3.6260%. On the long end, Germany's 30-year yield DE30YT=RR inched down 1.5 bps to 3.3315%.