Jan 8 (Reuters) - Euro zone government bond yields rose on Monday after money markets scaled back late last week expectations for future policy rate cuts.
Data showed that German inflation rose in December due to base effects, temporarily stopping the downward trend seen in the last months, offering the European Central Bank an argument for keeping rates steady for some time.
The bloc's borrowing costs and market expectations for policy rate reductions were now around levels seen in mid-December 2023, before a year-end bond rally in thin trading conditions. Bond prices move inversely to yields.
Germany's 10-year government bond yield, the benchmark for the euro area, rose 4 basis points (bps) to 2.19%.
It was around 2.14% in mid-December last year before hitting 1.896% on Dec. 28, its lowest level in 2023.
Money market bets on 2024 ECB rate cuts were last around 145 bps. They were over 170 bps late last year and at 168 basis points early on Thursday before falling to 140 bps right after Friday's U.S. jobs data.
Investors will focus on U.S. consumer price data due on Thursday, which could provide further clues about the Federal Reserve monetary policy path.
U.S. Treasury yields were edging higher in early London trade, with the 10-year up one bp, after whipsawing on Friday before ending higher as a strong jobs report and an unexpectedly weak reading of the services sector gave clashing views of the strength of the U.S. economy.
Several analysts regard the recent money market pricing of the 2024 ECB policy path as overly ambitious.
Bond supply is also in focus, with a 150 billion euros ($164 billion) of government bond sales in January fuelling unease in euro area bond markets.
“One factor behind this pullback (in bond prices) could just be that the market wants a better clearing price (higher yields) to absorb the January issuance deluge,” Barclays analysts said in a note to clients.
“Recall that at the start of 2023, the situation was the exact opposite: yields had risen 70-80bp in December 2022 and ended the year at the highs,” they added.
Investors reckon that the supply outlook for 2024 would be manageable, especially in the context of policy easing, but it could be a headwind to higher bond prices.
Barclays estimated net euro area government bond supply to be at 675 billion euros in 2024, the highest on record, but just 3.7% above 2023 levels of 650 billion. They see gross supply roughly unchanged versus 2023.
Analysts expect net euro area government bond supply to decline – to roughly 460 billion euros according to Barclays - while ECB quantitative tightening (QT) flows are set to increase despite a cautious runoff plan for the Pandemic Emergency Purchase Programme (PEPP), which involves 7.5 billion of bond sales per month in the second half of the year.
The ECB bond sales include the rundown of the ECB's Asset Purchase Programme (APP) bond portfolio.
Italy's 10-year government bond yield, the benchmark for the euro area's periphery, rose 6 bps to 3.89%.
The gap between Italian and German 10-year yields rose to 169 bps. It hit 154 bps late last year, its tightest in over 6 months, while it was at around 175 bps in mid-December. ($1 = 0.9152 euros)
(Reporting by Stefano Rebaudo, editing by Emelia Sithole-Matarise) ;))
