Euro Zone Bond Yields Steady Amid French Elections and US Inflation Data

Euro zone bond yields remained stable on Friday as markets awaited U.S. inflation figures and the first round of France's parliamentary election. German and French 10-year bond yields showed little change, maintaining the spread close to its 2017 high. The outcome of the French election remains unpredictable with opinion polls suggesting a win for the far right.

Euro zone bond yields held steady on Friday ahead of U.S. inflation numbers and the first round of voting in France's parliamentary election this weekend, while shrugging off French inflation data that was in line with expectations. German 10-year bond yield, the benchmark for the euro zone bloc, was little changed at 2.45%, while France's 10-year yield was 3.27%, also steady on the day.

That left the spread between the two at 81.5 basis points, testing its 2017 high of 82.8 bps, a break past that level would take the spread to its widest since 2012. It widened significantly earlier this month after President Emmanuel Macron called the snap parliamentary election. Opinion polls point to the far right winning the most seats, but falling short of an overall majority, while a far left bloc comes in second.

The first round of voting is on Sunday, but the final outcome will not be known until after a second round of voting on July 7. It is hard to predict the outcome as it will largely depend on to what extent rivals of the far-right Rassemblement National party will team up and withdraw their own runoff candidates to block the far right. "The French election is likely to be the main focus by Monday, but before we get to that, today will bring several important inflation numbers," said Jim Reid, global head of macro research at Deutsche Bank, in a morning note.

"In particular, we’ve got the US PCE inflation report for May, which is the measure that the Fed officially target, and hence is closely followed in markets." That data is due at 1230 GMT, and analysts polled by Reuters are expecting a 2.6% year on year gain for both headline and core PCE.

French preliminary inflation for June was released earlier on Friday. The EU-harmonised measure came in at 2.5% in line with expectations. It did little to move bond markets. Italy's 10-year yield was lower by 2.2 basis points​ at 4.01%.