Bund yields set for steep weekly decline before US data, tariff ruling

By Stefano Rebaudo

Jan 9(Reuters) - Euro area benchmark Bund yields were on track for their steepest weekly decline since March, after pulling back from near nine-month highs following weak economic data.

Investors are expected to stay on the sidelines ahead of key U.S. economic data later in the day and a possible Supreme Court decision on whether former President Donald Trump’s sweeping tariffs were lawful.

Data showed earlier this week December inflation slowed more than expected in Germany and reached 2% in the euro area.

HCOB's final composite Purchasing Managers' Index for the bloc confirmed the euro zone economy expanded at a slower pace last month.

Germany’s 10-year yields DE10YT=RR, the euro area’s benchmark, were down 0.5 basis points (bps) at 2.82% and set for a weekly drop of 7.5 bps, the biggest since early October.

They climbed to 2.917% before Christmas, just a couple of bps shy of March highs, when Germany struck a political deal to increase infrastructure and defence spending.

Felix Vezina-Poirier, chief strategist at BCA Research said Friday's data, which followed a deterioration in euro zone economic sentiment in December, backed the case for more monetary easing.

“Given this combination of weak momentum and moderating inflation, reflationary European Central Bank cuts are likely this year,” he said.

However, money markets continued to price a very small probability of an easing move in 2026, implying around a 15% chance of a cut by this summer EURESTECBM5X6=ICAP and a deposit rate stable at 2% in December EURESTECBM8X9=ICAP.

Data showed on Friday German exports unexpectedly fell in November, while industrial output rose despite expectations for a decline.

“Europe’s economic problem child has finally delivered some positive news,” said Carsten Brzeski, global head of macro at ING, referring to the output data.

“The structural headwinds, like geopolitical shifts and the changing role of China in the global economy, remain a severe challenge for German industry,” he said.

German 30-year yields DE30YT=RR fell 0.5 bps to 3.47%. They reached 3.556% last year, their highest level since July 2011, as long-dated debt came under pressure from expectations of heavier bond supply.

German 2-year yields DE2YT=RR, more sensitive to expectations for policy rates, rose 0.5 bps to 2.10%.

Italy’s 10-year government bond yields IT10YT=RR were down 1.5 bps at 3.46%, with the gap against Bunds at 63 bps after reaching 60 bps last week, its lowest since September 2008.