Euro zone bond yields nudge higher in short week

By Amanda Cooper and Lucy Raitano

LONDON, Dec 22 (Reuters) - Euro zone government bond yields edged up on Monday, extending the rise of the previous week after the European Central Bank left monetary policy unchanged and signalled that further rate cuts were unlikely for at least another year.

German 10-year Bund yields ended last week around their highest since mid-March, having risen another 3 basis points to bring the total this month to 20 bps, echoing the broader trend in the global fixed-income market.

The 10-year Bunds DE10YT=RR, which serve as a benchmark for the wider euro zone, were up 2.2 bps at 2.9%.

Yields on the two-year Schatz, which are more reactive to changes to interest rate expectations and rose 13 bps last week, were flat at 2.16%.

Money markets currently show that traders expect euro zone rates to remain unchanged through 2026, with a roughly 50/50 chance of a first increase by around April 2027.

ECB President Christine Lagarde, in her post-decision press conference, maintained her view that the central bank is in a good position with its monetary policy.

Economists at Barclays said they believed that the likelihood of the next move being an increase was not clear-cut.

"During the press conference, President Lagarde made sure to preserve the ECB's optionality. She reiterated that the central bank is in a good place, but not a static place, and emphasised that all options remain on the table, implying that the next move could be a cut or a hike," they said in a note.

"Although we see the ECB on hold over the next two years and the bar for a policy change in either direction as high, we continue to see risks tilting towards lower, not higher, rates over our forecast horizon," they added.

With only two full trading days left this week for the bond market, liquidity is likely to be limited. This could lead to bigger moves in yields than usual, a dynamic that tends to play out in the wider financial markets at this point in the year.

French Prime Minister Sebastien Lecornu held talks on Monday with French political leaders on emergency legislation to keep the government running in the new year in the absence of a proper budget.

French 10-year bond yields > were 2.3 bps higher at 3.63%.

European Union leaders last week agreed to offer Ukraine a 90 billion euro loan over two years, leaving aside an unprecedented proposal to use frozen Russian assets to fund Kyiv's war efforts.

A survey published on Monday by economic institute Ifo showed that about 26% of German companies expect their business to deteriorate in 2026. It showed that 59% of the companies do not expect their economic situation to change in the coming year and 14.9% hope to see an improvement.

Citi economists are pencilling in a deterioration in the European Commission economic sentiment indicator, mostly driven by the manufacturing sector, in light of the Ifo and PMIs having declined in December.

Data last week showed Europe's leading economies closed off a turbulent year on weak momentum with little sign of an upswing.

"For the Eurozone, the next three weeks will see the release of December HICP inflation and economic sentiment as the most relevant data. The former should still be hawkish, the latter show some signs of softening," wrote Citi economists in a note on Monday.