Euro zone government bond yields edge higher with Germany, US data in focus

By Stefano Rebaudo

Nov 13 (Reuters) - Bund yields rose on Thursday after three straight days of modest declines as investors awaited U.S. economic data, while Germany's growth figures raised questions about the size of any boost to growth from the government's fiscal stimulus.

German borrowing costs have been hovering near levels last seen in mid-January, before a March political deal in Germany to increase spending on defence and infrastructure.

New U.S. data will be key to shaping expectations for the Federal Reserve’s policy path, which could also influence views on the euro area rate outlook.

Germany’s 10-year government bond yields DE10YT=RR rose 2.5 basis points (bps) to 2.66%, after falling 2 bps in three sessions. They were at 2.63% in mid-January.

Markets tweaked their bets on Fed policy rate cuts after U.S. President Donald Trump on Wednesday signed legislation ending the government shutdown, with lingering economic uncertainty keeping investors cautious.

MARKETS PRICE 53% CHANCE OF 25-BP EASING MOVE

They priced a 53% chance of a 25 basis-point easing move by year-end from 60% the day before and about 65% early this week, according to CME Group's FedWatch tool.

"Hopefully, it (the economic data reporting) will come quickly as the shutdown has lasted more than 40 days and is clearly weighing down on the U.S. economy and sentiment," said Kristina Hooper, chief market strategist at Man Group.

"There seems to be growing concern about persistent inflation, which could be an obstacle to more rate cuts any time soon," she added.

In the euro area, traders were still pricing in about a 40% chance of a 25-basis-point ECB rate cut by September EURESTECBM7X8=, and a depo rate at 1.97% by March 2027, versus the current 2%.

Euro zone industrial production rose far less in September than economists had predicted, though the big economies fared well and the shortfall was due to volatility among large foreign companies based in Ireland for tax reasons.

"The timelier evidence on overall industry is consistent with output stagnating in year-on-year terms at the start of the fourth quarter," said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.

"With euro zone manufacturers facing major structural headwinds, we think that the medium-term outlook is pretty bleak," he added.

The German Council of Economic Experts on Wednesday cut its forecast for the German economy in 2026 and predicted only modest growth this year.

Germany’s 2-year yields DE2YT=RR, more sensitive to expectations for ECB policy rate outlook, were up 2 bps at 2.02%.

Euro area 2-year borrowing costs hovered just below levels seen after the ECB’s uneventful October 30 policy meeting, as markets have priced in a "higher-for-longer" rate path since the summer.

Italy’s 10-year government bond yield IT10YT=RR rose 2.5 bps to 3.39%, while the gap over safe-haven German Bunds -- a gauge of the extra return investors demand to hold Italian debt instead of German bonds – was at around 72 bps, its tightest level since 2010.