Euro area yields dip as US bond sell-off abates
Updates at 1555 GMT
German 10-year bond yield falls 3 basis points to 2.358%
Political chaos in Germany adds to market volatility
US yields have risen since last week's election
By Medha Singh, Harry Robertson
Nov 14 (Reuters) -European government bonds yields dipped on Thursday as a rise in U.S. yields moderated, with bond markets remaining volatile after Donald Trump's victory in the Nov. 5 presidential election.
The euro zone benchmark, the German 10-year bond yield DE10YT=RR, dipped by 3basis points (bps) to 2.358% after rising for two straight sessions. Yields move inversely to prices.
On the one hand, euro area yields tend to mirror a surge in their U.S. counterparts, and on the other, the threat of U.S. tariffs under the incoming Trump administration has added to worries about a fragile economic recovery in the euro area, bolstering the case for more rate cuts by the European Central Bank, which has pressuredyields.
"Europe is really caught in between weakness in European economy, more aggressive ECB easing versus vigilantes in the United States over fiscal policy and trade tariffs," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.
Adding to the mix was political chaos in Germany after the government collapsed last week. With snap elections now slated for February, markets are already pricing the potential for more government spending to aid Europe's largest economy, which just dodged a recession.
"Until the election, it's going to be quite erratic," Broux said, about the outlook for euro zone debt markets.
U.S. benchmark 10-year yields US10YT=TWEB hit a four-and-a-half-month high at 4.483%. They later fell and were last down 2 bps at 4.426%, even as data showed U.S.producer prices picked up in October and U.S.jobless claims fell last week.
U.S. yields have risen since the election, with Trump's promises for cutting taxes, raising import tariffs and immigration seen as likely to stokeinflation. US/
Trump's fellow Republicans will control both houses of Congress when he takes office in January, Edison Research projected on Wednesday, giving him more leeway to push through his policies.
Germany's 10-year asset swap spread DE10IRS10Y=RR was at -7 bps after falling to-9 bps, its lowest level in at least two decades, according to LSEG data, in part reflecting the potential for extra borrowing from Germany next year to boost its economy.
Data on Thursday was mixed as a report showed euro zone industrial production fell more than expected in September, while another indicated employment rose a touch more than expected last quarter and the economy expanded at a respectable pace.
Business surveys due next week will be pivotal in offering more hints about whether the euro zone economy lost momentum in the fourth quarter, Broux said.
Traders are currently fully pricing a quarter-percentage-pointrate cut by the ECB in December, with about a 20% chance of a half-percentage-point reduction.
Germany's two-year bond yield DE2YT=RR, which is more sensitive to ECB rate expectations, fell 4 bpsto 2.113% after hitting nearly a three-week low of 2.097% on Tuesday.
Italy's 10-year yield IT10YT=RR, the benchmark for the euro zone periphery, fell 6 bps to 3.571%,while the spread between Italian and German 10-year yields DE10IT10=RR – a gauge of therisk premium investors demand to hold Italian debt – stood at 121 bps, the tightest since Oct. 31.
Reporting by Medha Singh in Bengaluru and Harry Robertson in London; Editing by Angus MacSwan, Chizu Nomiyama and Paul Simao
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