Euro zone yields steady, good bond auction demand supports secondary market moves

By Alun John

LONDON, Jan 15 (Reuters) - Euro zone bond yields held steady in early trading on Thursday after hitting an over-one-month low the day before when a small bout of risk aversion gripped markets and spurred investors to seek safety.

Germany's 10-year yield, the benchmark for the euro zone, was flat at 2.82%, while its two-year yield was up a whisker at 2.09%. > DE2YT=RR

The 10-year yield dropped as low as 2.78% on Wednesday, but that rally petered out as some of the market nerves that had investors selling stocks and buying bonds dissipated, and higher oil prices weighed. O/R

Government bonds have been responsive to oil prices in recent days given their links to inflation, and eventually central bank policy.

This year so far European yields have been falling from recent peaks as many countries successfully issue bonds, removing a minor worry from the market late last year.

Germany's 10-year yield rose as high as 2.91% in late December, a nine-month high.

"That leg of higher yields we saw at the end of the year was preparing for the supply season. Everything has been well absorbed ..., which tells me that the market is happy to buy at these levels," said Jorge Garayo, senior rates strategist at Societe Generale.

Spain sold a total of 5.86 billion euros of debt on Thursday to strong demand, after Germany drew healthy demand on Wednesday.

Even French auctions have experienced decent demand despite the country remaining near the top of euro zone bond investors' minds as it continues to try to pass a budget for 2026. FR10YT=RR

France will enter the danger zone if the country's deficit were to be higher than 5% in 2026, ECB policymaker and Bank of France Governor Francois Villeroy de Galhau said on Wednesday.

But in secondary markets on Thursday, French debt was moving in line with the German benchmark, and its 10-year yield was last 3.50% unchanged on the day. FR10YT=RR

Italy's 10 year yield was also unchanged at 3.42% IT10YT=RR

Remarks from multiple European Central Bank and U.S. Federal Reserve policymakers are due later in the day, and investors will be watching closely for any hints they drop.

The ECB is set to keep rates firmly on hold in the coming months, though markets see a good chance of one 25-basis-point rate cut from the Federal Reserve in the first half of this year.