Euro zone government bond yields edge down, US data in focus

By Stefano Rebaudo

Jan 14 (Reuters) - Euro zone government bond yields edged down on Wednesday, with investors focused more on economic fundamentals than concerns about Federal Reserve independence and geopolitics.

A reading on U.S. inflation for December came in as expected on Tuesday, after euro zone borrowing costs recorded their steepest decline since March last week on weak economic data.

Investors await U.S. retail sales and producer price data later in the session.

Germany’s 10-year yields DE10YT=RR, the euro zone's benchmark, were down 0.5 basis points at 2.81%. They dropped 7.3 bps last week, the sharpest fall since the week beginning March 31.

They climbed to 2.917% before Christmas, just a couple of basis points shy of early March highs, when Germany struck a political deal to ramp up infrastructure and defence spending.

The sell-America trade was muted in sovereign bonds and equities on Monday after the U.S. Department of Justice threatened to indict Federal Reserve Chair Jerome Powell, while the dollar weakened.

The yield gap between U.S. Treasuries and Bunds DE10US10=RR was at 135 bps on Wednesday, after rising 3 bps to 137 bps on Monday. It hit 122.86 in mid-December, the lowest since June 2023, as expectations grew that the Fed would cut rates further while the European Central Bank was seen holding steady through all of 2026.

German 30-year yields DE30YT=RR were flat at 3.45%.

German 2-year yields DE2YT=RR, more sensitive to expectations for policy rates, were roughly unchanged at 2.10%.

Italy’s 10-year government bond yields IT10YT=RR dropped one bp to 3.44%, with the gap versus Bunds at 62.50. It reached 60 bps on January 2, the lowest since September 2008.