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.

Data on Wednesday showed U.S. producer prices picked up slightly in November amid a surge in the cost of gasoline, but businesses appeared to be absorbing some of the tariffs on imports, with trade margins compressing.

In the meantime, U.S. retail sales increased more than expected in November as motor vehicle purchases rebounded and households increased spending elsewhere, pointing to solid economic growth in the fourth quarter.

Germany’s 10-year yields DE10YT=RR, the euro zone's benchmark, were down 3.1 basis points (bps) at 2.78%. 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.

"While yesterday's below-consensus core consumer price print out of the U.S. certainly helped limit the upside in yields, today's data could become challenging," said Hauke Siemssen, rate strategist at Commerzbank.

An upbeat retail sales print could weigh on U.S. Treasuries and limit the upside for Bunds.

While concerns about regional conflicts remained in the background, European Central Bank Vice President Luis de Guindos said on Wednesday that geopolitical tensions are casting a shadow on the euro zone's growth outlook, particularly for highly indebted or trade-dependent countries.

FRANCE POLITICS BACK IN FOCUS

Citi analysts said in a morning note that political risks are returning to focus in France as Rassemblement National leader Marine Le Pen's appeal opened on Tuesday. Its outcome will determine whether she can run in the 2027 presidential election.

French 10-year bond yields FR10YT=RR fell 2.5 bps to 3.49%, with their spread versus Bunds DE10FR10=RR at 71 bps. The yield gap hit its highest levels in 13 years at around 90 bps in 2025 and late 2024.

The 2026 budget remained in focus. France will enter the danger zone if the country's deficit were to be higher than 5% in 2026, ECB policymaker and Bank of France Governor Francois Villeroy de Galhau said on Wednesday.

Italy's 10-year government bond yields IT10YT=RR dropped 2.5 bps to 3.42%, with the gap versus Bunds at 62.50 bps. It reached 60 bps on January 2, the lowest since September 2008.

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 136 bps on Wednesday, after rising 3 bps to 137 bps on Monday. It hit 122.86 bps 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.