Euro zone bond yields dip as investors focus on US data, French politics

Euro zone government bond yields were down slightly on Tuesday after a jump in Treasury yields tied to U.S. inflation data spilled over into Europe.

German 10-year yields (DE10YT=RR), the euro area's benchmark, fell 2 basis points (bps) to 2.71%, not far from nearly a four-month top of 2.737% on Monday.

Euro zone yields initially backed off from that level on Tuesday, with the German yield down around 5 bps, but they reversed course in afternoon trading in Europe, in line with U.S. peers after data showed U.S. consumer prices increased by the most in five months in June.

"We already saw some tariff-driven price increases in household appliances in the May CPI report, and that has continued," Glenn Purves, global head of macro at the BlackRock Investment Institute, said in emailed comments.

"Yet we believe the impact is mostly still to come and will build up after companies have exhausted the inventories they imported to get ahead of tariffs."

The U.S. 10-year Treasury yield was last up 5 bps at 4.48%. US10Y

The German 30-year yield (DE10YT=RR) was down 3 bps at 3.22%, after reaching 3.26% on Monday, its highest level since October 2023.

The two-year yield – more sensitive to expectations for European Central Bank policy rates – fell just over 1 bp to 1.86%.

That meant the German yield curve flattened slightly, with the spread between 10-year and two-year yields (DE2DE10=RR) down slightly at 85 bps. It climbed 6.1 bps on Monday, in its biggest daily rise since April 7 after a jump in Japanese yields.

The curve steepens when long-dated yields increase more quickly than the short-dated ones.

Markets have priced in an ECB terminal rate roughly unchanged at around 1.75%–1.80% (EURESTECBM4X5=ICAP), keeping short-dated yields in check while yields on longer maturities have risen amid expectations of a significant increase in German fiscal spending.

FRENCH BUDGET SQUEEZE

Investors are also watching the political situation in France after Prime Minister Francois Bayrou said on Tuesday the country must act fast to avoid being "crushed" by its public debt, as he outlined a 40 billion-euro budget squeeze.

Opposition parties threaten to topple his minority government.

But markets were largely unmoved by developments at least on on Tuesday, with French 10-year yields (FR10YT=RR) moving in line with German ones, last down 3 bps at 3.40%.

The gap between French and German yields (DE10FR10=RR), a market gauge of the risk premium investors demand to hold French debt was 70 bps.

"The most likely path seems a gradual dilution of saving measures with the final budget potentially targeting a deficit of around 5% of GDP and with further slippage during the year," said Aman Bansal, director of European rate strategy at Citi.

Citi targets an OAT-Bund spread of 75 bps in 2025, but sees a yield gap between (French) OAT yields and (German) Bunds at 60 bps if the government succeeds in getting the budget approved.

Italy's 10-year government bond yields IT10Y were down 3 bps at 3.59%, with the spread between (Italian) BTPs and Bund yields at 89 bps. It hit 84.20 bps earlier this month, its lowest level since March 2015.