German 30-year yields set for weekly rise, French spread hits 19-month low

By Stefano Rebaudo

Jan 23 (Reuters) - German ultra long-dated bond yields were on track for their sharpest weekly rise in nearly two months on Friday, as traders braced for continued supply pressure and shrugged off mixed purchasing managers' index data.

Economists expect the euro area to increase fiscal spending after Germany unveiled landmark investment plans, while geopolitical tensions are also prompting greater defence outlays across the single-currency bloc.

Germany’s 10-year government bond yield DE10YT=RR, the euro area’s benchmark, rose one basis point (bp) to 2.89%.

Euro zone business activity growth held steady this month as a weaker expansion in the dominant services industry offset milder factory contraction, according to a survey, while price pressures picked up.

The 30-year yield DE30YT=RR rose 0.5 bps to 3.50%, and was set for a weekly rise of 7.5 bps, the biggest since early December.

"The PMIs suggest that inflationary pressures increased slightly," said Andrew Kenningham, chief Europe economist at Capital Economics.

"It will be noted by the ECB and will reinforce the view that interest rates should remain unchanged for now,” he added.

Meanwhile, hawkish signals from the Bank of Japan on Friday lifted short-term government bond yields to a three-decade high, while 30-year borrowing costs JP30YTN= fell 3 bps to 3.64% after hitting an all-time high at 3.68% earlier this week.

"In Europe, we likely won’t see sharp moves like we’ve seen in Japan this week, but the overall direction should also be for steeper curves," said Michiel Tukker, European rate strategist at ING.

BOND SUPPLY UNDER THE SPOTLIGHT

The gap between 30-year and 10-year German bond yields was at 60 bps, and set to end the week 3.5 bps higher, the biggest widening since mid-November.

"Net (bond) issuance is more manageable at aggregate level, but we continue to monitor where absorption capacity could be tested," said Nicolas Jullien, global head of fixed income at Candriam, after arguing that gross issuance expectations are elevated in several core markets.

"We maintain a 10s-30s steepener because structural forces, including Dutch pension fund-related dynamics, support a continuation of the steepening trend despite short-term volatility," he added.

That stretch of the German yield curve has been sensitive to fiscal expectations. It tends to steepen — with 30-year yields rising faster than 10-year maturities — when investors expect more fiscal spending and a greater supply of government bonds in the long term.

German 2-year yields DE2YT=RR, more sensitive to expectations for policy rates, were one bp higher at 2.13% and on track to end the week roughly unchanged.

MARKET BETS ON FRENCH BUDGET APPROVAL

The yield gap between French OATs and Bunds DE10FR10=RR fell 3 bps to 59 bps, after hitting 58 bps, its lowest since June 2024. The French government survived a second vote of no-confidence. Prime Minister Sebastien Lecornu will now again invoke the constitution to force the expenditure part of the budget through the National Assembly - a move that will almost certainly trigger further votes of no confidence.

Investors are betting on the approval of a budget with a deficit target of 5% of gross domestic product, and they expect only limited implications from the municipal elections in March.

Italy’s 10-year government bond yields IT10YT=RR were down one bp at 3.50%. The gap versus Bunds was at 59.50 bps, after tightening to 53.50 last Friday, its lowest level since August 2008.

Also Spain’s DE10ES10=RR and Greece’s DE10GR10=RR spreads hit their narrowest levels in almost two decades earlier this week.