Bund yields rise but head for weekly drop, gap with US Treasuries narrows

By Stefano Rebaudo

Nov 28 (Reuters) - Euro zone benchmark bond yields rose slightly on Friday, but were set for a second straight modest weekly decline as traders stuck to their expectations for the European Central Bank’s rate path after economic data and the ECB account.

German borrowing costs tracked U.S. Treasuries but rose by a smaller margin, narrowing the gap between 10-year Bunds and Treasuries.

"On the one hand, in the U.S. we just had very weak data and we also had month-end which could have been supportive of a bit more of a rally," said Evelyne Gomez-Liechti, multi-asset strategist at Mizuho International, also flagging overall illiquid positions in U.S. markets.

"On the German side, I feel that there is now a bit of a focus on what's coming up next year, one of the key topics is the fiscal story in Germany, investors are evaluating if everything is fully priced already or not."

Mizuho thinks there is still some way to go and therefore is more bearish on 10-year bund yields.

Germany’s 10-year yields DE10YT=RR, the euro area’s benchmark, were up 0.2 basis points (bps) at 2.7% but on track for a weekly 1-bp drop.

German inflation accelerated more than expected in November, reaching the highest level since February, while the number of people out of work rose and retail sales fell, data on Friday showed.

Germany's parliament meanwhile passed the budget for 2026 with over 180 billion euros ($208 billion) in new debt, outlining how Berlin will use its financial firepower to revive the anaemic economy.

That borrowing level was only surpassed during the pandemic in 2021, with 215 billion euros and is possible thanks to a special 500-billion-euro infrastructure fund and an exemption from debt rules for defence spending approved in March.

Elsewhere, market bets on the ECB’s easing path kept the deposit rate priced around 2%, after recent macro data and minutes signalled policymakers were open to another cut.

According to Christoph Rieger, head of rates and credit strategy at Commerzbank, "the risks to the ECB pricing look asymmetric in light of the recent fundamental developments."

Money markets indicated an around 30% chance of an ECB rate cut by September 2026 EURESTECBM7X8=ICAP and a depo rate at 1.95% in December 2026. EURESTECBM9X10=ICAP

Benchmark 10-year U.S. Treasuries yields US10YT=RR were up 0.3 basis points at 4.03% after falling for five straight sessions as data reinforced expectations the Federal Reserve will cut interest rates next month.

The yield spread between U.S. and German 10-year borrowing costs DE10US10=RR hit a fresh 8-month low at 129.50 bps.

Germany’s 2-year yields DE2YT=RR, more sensitive ECB rate expectations, were largely flat at 2.03%. It hit 2.051% last week, its highest level since March 28.

Italy’s 10-year bond yield IT10YT=RR was flat at 3.40%, with the gap versus Bunds at 70.79 bps after hitting earlier this week a fresh 15-year low at 69.50. DE10IT10=RR