Euro zone yields edge lower as traders digest last week's tectonic shift

By Alun John

LONDON, March 10 (Reuters) - Euro zone bond yields nudged down on Monday, with the mood far calmer than last week when the announcement of a paradigm shift in German fiscal policy drove the biggest weekly selloff in German debt since the 1990s.

Germany's 10-year yield, DE10YT=RR was down 4 basis points on the day at 2.8% as a risk off move across markets sent investors out of stocks and into safe haven bonds. MKTS/GLOB

The euro zone benchmark Bund yield <DE10YT=RR> rose as high as 2.884% last week, its highest since October 2023, and finished the week with a weekly rise of 40 basis points, after the parties hoping to form Germany's next government agreed to create a 500 billion euro ($543 billion) infrastructure fund and overhaul borrowing rules.

Analysts expect the move will boost growth, and, due to the significant increase in borrowing required, propel Germany into a new era of structurally higher government bond yields.

Bund yields also took a slight nudge lower when the Green Party's parliamentary co-leaders said on Monday they would not give their much-needed backing to the debt reforms - although the move was short lived, suggesting traders continued to feel that a compromise could be found.

U.S. Treasuries continued to rally, and outperformed Bunds again on Monday, with the U.S. 10 year yield down 10 bps at 4.22%, US10YT=RR. U.S. President Donald Trump on Sunday raised concerns about an impending U.S. recession.

That meant the gap between German and U.S. borrowing costs was 145 bps, somewhat steadier after hitting its lowest since July 2023 last week, when economic jitters driving investors to Treasuries meant they sat out the German-led global selloff. US10DE10=RR

"At current levels, we think that bulk of repricing in the rates market is done. Hence last week, we took off our (short) Bunds vs Treasuries view," Mohit Kumar, chief Europe economist at Jefferies, said.

The move in the 10-year Bund was largely reflected across the curve and across Europe. The German two-year yield DE2YT=RR dipped 3.5 bps to 2.21% and Italy's 10-year yield IT10YT=RR was one bp lower at 3.89%.