Euro zone bond yields set for biggest weekly rise since August

German Bund yields headed for their largest week-on-week rise since August, as slightly hotter-than-expected inflation data on Tuesday added to the case euro zone interest rates may not fall for some time.

German Bund yields headed for their largest week-on-week rise since August, as slightly hotter-than-expected inflation data on Tuesday added to the case euro zone interest rates may not fall for some time. After a rout in global bonds the previous day, the benchmark German 10-year Bund yield was up 1 basis point at 2.75%, around its highest since late September and bringing the increase from this time last week to 8.4 bps, the largest weekly rise since the middle of August.

Bund yields jumped nearly 6 bps on Monday, as investors pulled cash out of government bonds, which hit Treasuries and Japanese government bonds. STEEPENING YIELD CURVE

Mohit Kumar, chief financial economist Europe at Jefferies, said some talk around U.S. President Donald Trump's pick for the next chair of the Federal Reserve could be behind the faster rise in longer-dated bond yields, a dynamic known as curve steepening. "If you get a dovish Fed chair in an environment where economies are doing fine, the market gets worried about inflation, so that's why I think we saw quite a steepening of the curve and that was reflected in Bunds as well," he said.

The premium of 30-year German yields over 10-year yields was at 63.65 bps, around 1.6 bps wider on the day. This spread hit 64.4 bps last week, its highest since May 2019, reflecting the pressure on longer-dated bonds. Kumar said his team expected to see hedge funds start playing the Dutch pension fund reform story as well, which would be another factor that could prompt the curve to steepen further.

Dutch pensions have always been among the biggest buyers of long-dated euro zone debt. A change in the law means they no longer need such large holdings of ultra-long maturities and are likely to offload some of what they own. Euro zone flash inflation came in at 2.2% in November, helping cement the case for no near-term ECB rate cuts. Economists polled by Reuters had expected a reading of 2.1%.

Two-year yields were flat in late trading at 2.058%, having risen to a session high of 2.08% earlier, the most since late March. Money markets are overwhelmingly betting on no change at the ECB's next meeting in December and see little chance of a move during 2026.

EURO ZONE RATES SEEN HOLDING STEADY A couple of ECB officials this week have reiterated the expectation built into markets that euro zone rates were unlikely to change any time soon.

ECB policymaker Joachim Nagel, who heads Germany's Bundesbank, said in an interview published on Tuesday that euro zone inflation was practically at the central bank's 2% target and would fluctuate around it despite a tariff-induced price rise in the United States. Nagel's comments echoed those of fellow ECB official Martin Kocher, who said in an interview on Monday the central bank should keep its powder dry on interest rates for now, when asked whether the ECB would act given that inflation was forecast to be just below the 2% target next year.

Unemployment data for the euro area hit 6.4% in October against expectations of 6.3% in a Reuters poll. RBC strategists had expected euro area unemployment to remain unchanged at 6.3% - close to record lows.

"Generally, the unemployment rate has remained steady for the last year, but we do see some labour market slack emerging through lower vacancies rather than layoffs," they said in a note.

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