Euro zone yields steady; bond sales meet healthy demand

By Alun John and Sophie Kiderlin

LONDON, Jan 15 (Reuters) - Euro zone bond yields held steady in afternoon trading on Thursday after hitting an over-one-month low the day before when a small bout of risk aversion gripped markets and spurred investors to seek safety.

Germany's 10-year yield, the benchmark for the euro zone, was flat at 2.82%, while its two-year yield was up by one basis point at 2.09%. DE10YT=RR DE2YT=RR

The 10-year yield dropped as low as 2.78% on Wednesday, but that rally in prices petered out as market nerves that made investors sell stocks and buy bonds dissipated, and higher oil prices weighed.

Government bonds have been responsive to oil prices in recent days given their link to inflation and central bank policy.

European yields have been falling this year from recent peaks as many countries successfully issue bonds, removing a minor worry from the market late last year.

Germany's 10-year yield rose as high as 2.91% in late December, a nine-month peak.

"That leg of higher yields we saw at the end of the year was preparing for the supply season. Everything has been well absorbed ..., which tells me that the market is happy to buy at these levels," said Jorge Garayo, senior rates strategist at Societe Generale.

Spain sold a total of 5.86 billion euros of debt on Thursday to strong demand, after Germany drew healthy demand on Wednesday.

Even French auctions have experienced decent demand despite the country remaining near the top of euro zone bond investors' minds as it continues to try to pass a budget for 2026. FR10YT=RR

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

But in secondary markets on Thursday, French debt was moving in line with the German benchmark, and its 10-year yield was last 3.50%, unchanged on the day. FR10YT=RR

Italy's 10-year yield was also barely changed at 3.41%. IT10YT=RR.

Earlier on Thursday, European Central Bank policymaker Martins Kazaks said interest rates were still at an appropriate level , and euro zone inflation data was bringing positive signals.

Investors have had a close eye on remarks from central bank officials, with the ECB set to keep rates firmly on hold in the coming months. Markets, however, see a good chance of one 25 basis-point rate cut from the Federal Reserve in the first half of this year.

Fed independence also remains top of mind after the launch of an investigation into the central bank’s chairman, Jerome Powell, by U.S. prosecutors. Fitch’s top sovereign analyst said on Thursday that a significant erosion of Fed independence could negatively impact the U.S. credit rating.