UPDATE-Germany's Bund yield little changed, carry trade supports spreads

By Stefano Rebaudo

Jan 27 (Reuters) - Germany's 10-year government bond yield was little changed on Tuesday after ending a seven-day climb the day before, but remained close to its highest level since last March when German political leaders agreed to sharply increase fiscal spending.

Global trade tensions lingered in the background after U.S. President Donald Trump said on Monday he would raise tariffs on South Korean goods.

Germany’s 10-year Bund yield DE10YT=RR, the euro zone’s benchmark, fell less than 1 basis point to 2.864%, after hitting 2.9070% on Friday. It reached 2.94% in mid-March.

Germany's net borrowing in 2025 came in well below the level set out in its budget plan, helped by lower-than-expected spending and higher-than-expected revenues, the finance ministry said on Friday.

Germany's 2-year yield DE2YT=RR, more sensitive to expectations for policy rates, was down 1.5 bps at 2.1%.

The 30-year yield DE30YT=RR was little changed at 3.484%. It rose to 3.556% in late December, its highest since summer 2011.

ECB ON HOLD DAMPENS VOLATILITY

Strategists said market volatility has eased from the levels seen when tensions over Greenland escalated, as investors shifted their focus back to the European Central Bank’s steady policy stance. In this context, demand for higher‑yielding bonds has picked up again.

ECB policymaker Gediminas Simkus told Reuters he expects the central bank to keep policy on hold at the next meeting in February, but there is little certainty beyond that.

Money markets keep pricing a 15% chance of an ECB rate cut this summer EURESTECBM5X6=ICAP and about a 35% chance of a rate hike by April 2027 EURESTECBM11X12=ICAP.

"The carry-positive environment is also reflected in the tight spreads on European government bonds," said Michiel Tukker, rate strategist at ING.

Carry refers to the extra return investors earn by holding higher‑yielding sovereign debt, such as Italian or French bonds, while funding the position at lower euro money‑market rates.

"The spread between 10-year Italian and German government bonds is hitting new lows and French budget wins quickly translate to tighter spreads too," he said.

Tukker said he expected spreads to widen eventually, but that catalysts for such a move are missing for now.

The yield gap between French government bonds and safe-haven Bunds DE10FR10=RR - a market gauge of the risk premium investors demand to hold French debt - slightly widened to 56.5 bps after hitting a fresh 19-month low at 55.50 bps on Monday.

"When you look at the details of the French budget, it doesn’t really imply that the public deficit will shrink a lot or that public debt will come down," said Marco Wagner, economist at Commerzbank.

"But I think the main point, from the markets’ perspective, is that with this budget they’re basically buying themselves a year of added political stability," he said.

The French government survived two votes of no-confidence in parliament on Friday over its decision to ram through the income part of the 2026 budget.

Italy’s 10-year government bond yield IT10YT=RR rose half a basis point to 3.472%. The gap against Bunds was at 57.5 bps, after tightening to 53.5 in mid-January, its lowest level since August 2008.