Euro zone yields fall before key US, euro zone data; Spanish sovereign gets two upgrades

By Samuel Indyk

LONDON, Sept 29 (Reuters) - Euro zone government bond yields dipped on Monday ahead of key data releases this week from Europe and the United States, while Spanish yields edged down after the country received two sovereign ratings upgrades on Friday.

Activity in the debt market was relatively subdued as investors prepared for a possible U.S. government shutdown later in the week, which could disrupt the release of key monthly jobs data on Friday.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, was down 2.5 basis points at 2.721%, after hitting a 2-1/2 week high of 2.779% on Friday.

Yields have risen across the globe in the last two weeks, despite a rate cut from the U.S. Federal Reserve, as policymakers have sounded cautious about future rate reductions and economic data has proved resilient.

YIELDS FALL BACK

"Today's pullback in yields has to be seen in the context of what has happened over the last two weeks where we've seen quite a sizeable increase," said Jussi Hiljanen, rates strategist at SEB.

"If the Fed continues cutting rates as the market is projecting, the underlying trend in long-end yields will be lower."

Spain's 10-year bond yield ES10YT=RR was down 3 bps at 3.282%, broadly in line with the German benchmark, after both Moody's and Fitch upgraded their sovereign rating on Friday, citing the country's improving economy and labour market.

"Looking to next year, the growth outlook for Spain seems to be substantially brighter than any other countries in Europe," SEB's Hiljanen said.

"From that perspective, it's possible that we will see continued strong performance of Spanish bonds in relation to peers."

Italy's 10-year bond yield IT10YT=RR was down 3 bps at 3.580%, while France's FR10YT=RR was down 2 bps at 3.548%.

Markets are awaiting the release of key euro zone inflation data on Wednesday and the U.S. labour market report on Friday for indications on where interest rates might be heading.

A Reuters poll of economists expects euro zone consumer price inflation to tick up to 2.2% from 2% in September.

Before Friday's U.S. payrolls report, labour market indicators including the JOLTs report, ADP employment change, weekly jobless claims and Challenger job cuts are also scheduled for release.

"With the Fed laser-focused on downside risks to employment after several months of soft job growth, these prints will be critical in shaping the Fed's near-term trajectory," said Danske Bank analyst Kirsten Kundby-Nielsen in a note.

Markets are pricing in about a 90% chance of a Fed rate cut when it meets on October 29, after the central bank lowered borrowing costs for the first time since December earlier in September.

The U.S. government is also on the verge of a shutdown due to a funding impasse, potentially delaying the release of official data, including Friday's jobs report.

Without passage of funding legislation, parts of the government will close on Wednesday, the first day of the U.S. government's 2026 fiscal year.