Euro zone bond yields edge higher, inflation in focus

By Lucy Raitano

LONDON, Dec 2 (Reuters) - German Bund yields edged up again on Tuesday after a rout in global bonds unleashed the biggest one-day selloff in euro zone debt since September, as slightly hotter-than-expected inflation data added to the case that no more ECB rates are coming soon.

The benchmark German 10-year Bund yield DE10YT=RR was up 1 basis point at 2.75%, around its highest since late September. Yields jumped nearly 6 bps on Monday, following a rise in Treasury yields and Japanese government bonds .

Mohit Kumar, chief financial economist Europe at Jefferies, said some talk around U.S. President Donald Trump's pick for the next chair of the Federal Reserve could be behind the faster rise in longer-dated bond yields, a dynamic known as curve steepening.

"If you get a dovish Fed chair in an environment where economies are doing fine, the market gets worried about inflation, so that's why I think we saw quite a steepening of the curve and that was reflected in Bunds as well," he said.

The premium of 30-year German yields over 10-year yields was at 62.73 bps, having hit 64.4 bps, its highest since May 2019, last week DE10DE30=RR.

Kumar said his team expects to see hedge funds start playing the Dutch pension fund reform story as well, which would be another factor that could steepen the curve.

Dutch pensions have always been among the biggest buyers of long-dated euro zone debt. A change in the law means they no longer need such large holdings of ultra-long maturities and are likely to offload some of what they own.

Euro zone flash inflation figures rang in at 2.2% in November, data showed on Tuesday, helping cement the case for no near-term ECB rate cuts. Economists polled by Reuters had expected a reading of 2.1%.

Two-year yields DE2YT=RR were little changed by the news, rising 1 bp to 2.07%. Country-specific figures last week already reinforced the view that no further ECB rate cuts are coming in the near future.

In an interview published on Monday, ECB policymaker Martin Kocher said the central bank should keep its powder dry on interest rates for now, when asked whether the ECB would act given that inflation is forecast to be just below the 2% target next year.

"It's very in line with what (ECB President Christine) Lagarde has been saying ... that we keep rates on hold for now, the base case is that they're done," Kumar said.

Money markets are overwhelmingly betting on no change at the ECB's next meeting in December and see little chance of a move over 2026 IRPR.

Unemployment data for the euro area hit 6.4% in October against expectations of 6.3% in a Reuters poll.

RBC strategists had expected euro area unemployment to remain unchanged at 6.3% - close to record lows.

"Generally, the unemployment rate has remained steady for the last year, but we do see some labour market slack emerging through lower vacancies rather than layoffs," they said in a note.