Euro zone bond yields rise as markets anticipate another year of hefty supply

By Dhara Ranasinghe

LONDON, Jan 2 (Reuters) - Euro zone government bond yields edged higher on Friday, with investors looking ahead to a year that will be marked again by hefty new debt sales, the impact of German fiscal stimulus and geopolitical headwinds.

Bond trading across Europe was subdued after a holiday on Thursday, with most 10-year yields across the bloc 2-3 basis points higher on the day.

Germany's Bund yield was up 3.1 bps at 2.89% DE10YT=RR. It ended 2025 roughly 50 bps higher, the biggest annual increase since the 2022 global inflation surge.

French yields also rose in 2025, while Italian yields ended little changed and British gilt yields, a source of volatility in the past year, fell.

Slovenia has hired a group of banks, including Barclays, DZ Bank and HSBC, to manage a new 10-year bond, a lead manager note seen by Reuters showed. The deal was expected to be launched in the near future, the note said.

Commerzbank expects upward pressure on borrowing costs from new bond sales to stay in place.

It calculates that private investors will have to absorb a record high 234 billion euros ($275 billion) in net supply this year, when adjusted for European Central Bank activity.

Germany plans to issue a new 20-year bond, citing Dutch pension reform as one reason why the long-dated bond segment was attractive.

Dutch occupational pensions, the EU's largest, started shifting to a new system from January 1 that no longer promises benefits, allowing the nearly 2-trillion-euro sector to buy higher risk assets.

A Deutsche Bank survey published last month found investors expected Bund yields to remain little changed around 2.9% by end-2026, although 38% of those surveyed expected yields in the 3% to 3.25% area.

ALL EYES ON GERMANY

How Germany's spending bonanza pans out remains a key focus.

Zurich Insurance chief market strategist Guy Miller said his base case was for fiscal stimulus to boost long-term growth prospects.

"But there are clearly red flags, and the market is pretty pessimistic on the pace and scope of spending," he said.

"It's about how the money will be spent and they need to focus on the structural challenges they face, not simply trying to stimulate short-term consumption."

On the ECB outlook, some analysts see one more rate cut as more likely than not, while others suspect the next move could be a rate hike.

Euro zone manufacturing activity shrank further in December, private surveys released on Friday showed. The HCOB Eurozone Manufacturing Purchasing Managers' Index, compiled by S&P Global, fell to 48.8, its lowest in nine months.

Traders expect no change when the ECB meets in February, and price in a roughly 20% chance of a rate increase by year-end.

Rate-hike speculation received a boost last month when ECB rate-setter Isabel Schnabel said the next move may be an increase. She later said she expected no hike in the foreseeable future.

"We've got policy rates on hold, with an outside chance of a cut in the first quarter should growth disappoint," said Miller.