Euro zone bond yields edge off six-week highs

(Updates with afternoon European trading)

LONDON, Dec 30 (Reuters) – Euro zone bond yields dipped on Monday, edging off near-six-week highs hit at the end of last week as investors grappled with an uncertain monetary policy and borrowing outlook for 2025.

Germany’s 10-year bond yield, the benchmark for the euro zone, was last down 3 basis points (bps) at 2.36%.

The move, in mid-afternoon trading in Europe, echoed a similar fall in the United States where Treasury yields dropped after data showed a contraction in activity in the U.S. midwest.

U.S. Treasury yields set the tone for borrowing costs around the world.

The moves lower also appeared to be a result of traders rebalancing their positions as the end of the year approaches, and after bond yields have risen steadily in recent weeks.

The German bund yield reached as high as 2.405% on Friday, its highest since Nov 18.

A strong U.S. economy has limited the amount the Federal Reserve is expected to cut rates next year, while the euro zone economy has also shown some minor signs of improvement.

The decline in euro zone business activity eased this month as the bloc’s dominant services industry bounced back to growth, survey data showed on Dec. 16.

“Real rates are rising primarily for macro reasons,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers, referencing bond yields adjusted for inflation.

“The improvement in current economic conditions – notably in China and Europe, against a backdrop of improving U.S. industrial surveys – has led to a revision of central bank rate cut expectations.”

He added: “The market now only expects 1.5 rate cuts in the United States in 2025, suggesting a scenario of strong growth and renewed inflationary pressures.”

Italy’s 10-year yield was flat at 3.53%, and the gap between Italian and German bond yields stood at 116 bps.

Germany’s two-year bond yield, which is more sensitive to European Central Bank rate expectations, was down 2 bps at 2.08%, having hit its highest since Nov. 22, late Friday.

Elections in Germany in February will be a focal point early next year for investors, who are wondering whether a new government will allow higher public borrowing to prop up the flagging economy.

Yield curves have steepened this year – longer-dated yields have risen more than shorter-dated ones – as economies have been relatively resilient but cooling inflation has allowed central banks to cut rates.

Germany’s 10-year bond yield has risen around 36 bps in 2024 but the two-year yield has fallen around 30 bps. (Reporting by Harry Robertson; additional reporting by Alun John Editing by Angus MacSwan)