Bund yields eye biggest weekly fall since March before US data

By Stefano Rebaudo

Jan 9 (Reuters) - Euro area benchmark Bund yields were on track on Friday 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 President Donald Trump's sweeping tariffs are lawful.

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

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. They were above 2.90% early this week.

“The consensus of economists point to moderate (U.S.) job gains of around 70,000 in December but market expectations have drifted higher in recent days, supported by encouraging data from the Institute for Supply Management," said Julien Lafargue, chief market strategist at Barclays.

U.S. benchmark 10-year Treasury yield US10YT=RR edged 0.5 bps up to 4.19%, after rising the day before.

On the euro area front, data showed 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.

Felix Vezina-Poirier, chief strategist at BCA Research, said Friday's figures, which showed 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, 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 one bp 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 2 bps at 3.46%, with the gap against Bunds at 63 bps after reaching 60 bps last week, its lowest since September 2008.