Euro zone yields edge up from one-month lows

By Alun John

LONDON, Jan 8 (Reuters) - Euro zone government bond yields edged up from one-month lows on Thursday, and yield curves steepened a touch, as this week's rally on cooler-than-expected inflation data paused, partly due to higher oil prices and stronger producer price inflation.

Several large European countries have sold new bonds this week, with auctions on Thursday from Spain and France drawing robust demand.

Germany's 10-year yield DE10YT=RR, which acts as a benchmark for the wider euro zone, was up 3 basis points at 2.84% in afternoon trading, roughly where it had held for most of the day. It is still down over 6 bps this week so far, as prices have risen.

Yields on the 10-year Bund touched a one-month low of just under 2.8% on Wednesday after data showed euro zone inflation slowed to 2% last month.

The move lower in oil prices this week has helped strengthen expectations that inflation is under control, supporting bonds. Oil prices rose on Thursday, nudging yields up. O/R

Also in the mix was data showing euro zone producer price inflation rose 0.5% month on month, compared to a Reuters survey outcome of 0.2%, challenging that sanguine view on inflation.

But a European Central Bank survey showed euro zone consumers kept their inflation expectations unchanged in November, predicting a steady slowdown in price growth towards the ECB's 2% target in the coming years.

CURVE MOVES

Shorter-dated bond yields rose less than those on longer maturities. German two-year yields DE2YT=RR were up 1.3 bps at 2.1%, while 30-year yields were up 3 bps at 3.475% DE30YT=RR.

That meant the German yield curve steepened, longer-dated bond yields rose more than shorter-dated ones.

The German yield curve had been flattening slightly in the last few sessions.

The market consensus is that curves will steepen as the Dutch occupational pension system, the European Union's largest, starts transitioning to a new system, adding to pressure on long-term government bonds.

"Market players with long-end steepener trades may fear a similar flattening episode to what we saw last September," said analysts at ING in a note.

Curves that steepened sharply in August suddenly flattened in September last year.

"If the flows from Dutch pension funds do not meet expectations, then an unwind ... may accelerate the flattening move," ING added.

Moves in other euro zone bonds were largely in line with the benchmark. French and Italian 10-year yields were both up 1.4 bps, with France's at 3.54% and Italy's at 3.5%. FR10YT=RR, IT10YT=RR

Both France and Italy saw slightly larger increases in 30-year yields, and smaller in those for 2-year paper.

The large amount of issuance on Thursday was fairly well digested by the market.

France sold 13.5 billion euros ($15.75 billion) of debt and Spain just over 7 billion euros.

($1 = 0.8569 euros)