Euro zone yields at multi-week lows, market gauge of inflation below 2%
Updates prices
By Medha Singh
Nov 26 (Reuters) -Euro zone government bond yields hit multi-week lows on Tuesday, while a key inflation gauge dropped below the European Central Bank's 2% target ahead of price data later this week.
Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, was last up 0.5 basis points (bps) at 2.21%. It hit a five-week low in the morning session at 2.19%.
German borrowing costs have been mirroring a slide in U.S. Treasury yields on Monday after President-elect Donald Trump nominated Scott Bessent for U.S. Treasury secretary, fuelling hopes for better fiscal discipline.
Bond prices move inversely to yields.
The latest Ifo economic institute survey showed the mood in Germany's export industry improved slightly in November as companies waited for more details on Trump's trade policies.
Trump, who announced plans for drastic tariff increases on imports from Canada, Mexico and China on Monday, said during his election campaign that he would also place high tariffs on goods from the European Union.
"Trump is not targeting Europe - yet - but fears that tariffs will inevitably follow is another handicap for euro zone growth and could accelerate the return of ECB rates to/below neutral next year," said Kenneth Broux, head of research FX and rates at Societe Generale.
A closely watched gauge of the market's long-term euro zone inflation expectations EUIL5YF5Y=R hit 1.997% on Tuesday for the first time since July 2022.
ECB policymakers have said the bloc's interest rates will keep falling as inflation is largely defeated and weak economic growth could be exacerbated by higher U.S. trade tariffs.
Markets have raised bets of more aggressive policy easing by the ECB, while pricing in a relatively more hawkish stance from the Federal Reserve and Bank of England.
Euro zone inflation data for November is due on Friday, among the final batch of major data releases before the ECB's policy meeting next month.
Traders are expecting a 25 bp interest rate cut in December, while assigning around a 25% chance of a 50 bp reduction.
Germany's two-year bond yield DE2YT=RR, which is more sensitive to policy rate expectations, was up 3 bps at 2.04%, after hitting its lowest since March 2023 last week at 1.979% following weak euro zone PMI data.
The German yield curve flattened with the spread between 2-year and 10-year bond yields DE2DE10=RR hitting 15.30 bps, a three-week low. It was last down 1 bp at 16 bps.
"We have been long Bunds arguing that the macro fundamentals did not support the sell-off around U.S. elections," said Mohit Kumar, economist at Jefferies.
"We are coming towards the lower end of our expected trading range. We are keeping our longs for now, but would look to take them off if 10-year Bund (yields) rally towards 2.10-2.15 area."
The gap between French and German yields DE10FR10=RR – a gauge of the premium investors demand to hold France's debt – was at 81.6 bps after widening to a three-month high of 83.1 bps late on Monday.
Far-right leader Marine Le Pen issued a new threat on Monday to bring down France's coalition government, after talks with Prime Minister Michel Barnier failed to satisfy her party's demands for budget concessions.
Italy's 10-year yield IT10YT=RR was down 0.5 bps at 3.46%, after hitting 3.44%, its lowest since Oct. 21.
Reporting by Medha Singh; Editing by Kirsten Donovan and Alex Richardson
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