Euro zone bond yields drop after data, supply in focus
By Stefano Rebaudo
Jan 6 (Reuters) - Euro zone government bond yields fell on Tuesday after data pointed to cooling inflation and confirmed the bloc's economy lost momentum in December.
Consumer prices rose slightly less than expected in France, while climbing 1.8% in Germany's most populous state, North Rhine-Westphalia.
HCOB's final composite Purchasing Managers' Index data showed the euro zone economy expanded at a slower pace last month but ended 2025 with its strongest quarterly growth in more than two years.
Germany's 10-year yields DE10YT=RR, the euro area benchmark, were down 2 basis points at 2.86%.
"The (German data) breakdown suggests the drop was mostly driven by energy inflation but it is encouraging that services inflation, which in Germany as a whole had risen quite sharply in recent months, also seems to have eased in some states," said Franziska Palmas, senior Europe economist at Capital Economics.
"It seems pretty clear that the bar for the European Central Bank to change its policy setting is high at the moment, and on the margin a fall in services inflation should consolidate that view," she added.
Oil prices fell on Tuesday, further easing inflation concerns, as the market weighed the prospect of higher Venezuelan crude output following the U.S. capture of President Nicolas Maduro.
Money markets now price in virtually zero chance of an ECB tightening move by December 2026 EURESTECBM8X9=ICAP and about 24% by March 2027 EURESTECBM10X11=ICAP, compared with 10% and 30% before the data. The deposit rate is currently at 2%.
BOND ISSUANCE UNDER THE SPOTLIGHT
Bund yields climbed to 2.917% before Christmas, just a couple of basis points shy of their March highs, when Germany struck a political deal to ramp up infrastructure and defence spending.
Supply is in focus, with Citi forecasting euro area gross issuance at 200 billion euros in January - the highest monthly supply on record - and projecting the net cash requirement (NCR) to remain elevated at 124 billion euros, only marginally below the record high seen in January 2025.
NCR refers to the net amount of funds euro area governments seek to raise through new bond issuances after accounting for repayments on existing debt.
German 30-year yields DE30YT=RR fell 1 bp to 3.50%. They reached 3.556% on December 22, their highest since July 2011, as long-dated debt prices came under pressure on expectations for heavier bond supply.
Yields on German 2-year Schatz DE2YT=RR, more sensitive to expectations for policy rates, fell 2 bps to 2.11%.
Italy's 10-year government bond yields IT10YT=RR dropped 2 bps to 3.51%, with the gap versus Bunds at 65 bps after touching 60 bps last week, its lowest since September 2008.
