Euro zone bond yields fall, 10-year Bund yield hits 3-week low

By Dhara Ranasinghe

LONDON, Dec 29 (Reuters) - Euro zone government bond yields fell on Monday, with Germany's benchmark 10-year Bund yield dropping to its lowest in three weeks in trade thinned by the holiday season.

That move followed a decline in U.S. Treasury yields on Friday, when markets across much of Europe were closed.

An easing in speculation over the scope for European Central Bank rate hikes in the year ahead has helped take pressure off a rise in borrowing costs across the bloc. Top hawk Isabel Schnabel said last week she expected no rate increase in the foreseeable future.

Germany's 10-year Bund yield fell as low as 2.824%, its lowest since December 8. It touched a nine-month high last week of 2.917% and was last trading about 4 basis points lower on the day at 2.827% DE10YT=RR.

Most 10-year bond yields across the euro zone were down about 4-5 bps as their prices rose FR10YT=RR, IT10YT=RR.

Signs of progress on ending the war in Ukraine did not appear to have much of an impact on safe-haven bonds, although European defence shares fell more than 1% .SXPARO.

U.S. President Donald Trump said on Sunday that he and Ukrainian President Volodymyr Zelenskiy were moving closer to an agreement to end the war in Ukraine, but acknowledged that the fate of the Donbas region remained an unresolved issue.

Investors in European bond markets also have one eye on the Netherlands as a new year approaches.

The Dutch occupational pension system, the European Union's largest, will start the transition to a new system from January 1, allowing the nearly 2 trillion euro ($2.35 trillion) sector to buy riskier assets.

This could add to pressure on long-term government bonds that already face reduced demand from big buyers such as central banks and other pension funds.

The German 10-year bond yield is on track to end the year almost 50 bps higher, set for its biggest one-year rise since 2022 when inflation across major economies surged.

This is in contrast to a fall in U.S. Treasury yields, which have been pushed down by expectations for U.S. Federal Reserve cuts.