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Yields tick higher on first trading day of new year

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Bond supply, German fiscal stimulus impact, ECB key themes

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Slovenia kicks off January supply

(Updates prices, adds final euro zone PMI, bullets,)

By Dhara Ranasinghe

LONDON, Jan 2 (Reuters) - Euro zone government bond

yields edged higher on Friday, with investors looking ahead to a

year that will be marked again by hefty new debt sales, the

impact of German fiscal ‌stimulus and geopolitical headwinds.

Bond trading across Europe was subdued after a holiday on

Thursday, with most 10-year yields across the bloc 2-3 basis

points (bps) higher on the ​day.

Germany's Bund yield was up just 1 bps at 2.87%.

It ended 2025 roughly 50 bps higher, the ‍biggest annual increase

since the 2022 global inflation surge.

French yields also rose in 2025, while ⁠Italian yields ended

little changed ⁠and UK gilt yields, a source of volatility in the

past year, fell.

Slovenia has hired a group of banks, including Barclays,

DZ Bank and HSBC, to ‌manage a new 10-year bond, a lead manager

note seen by ​Reuters showed. The deal is expected to be launched

in the near future, the note said.

Commerzbank expects upward pressure on borrowing costs from

new bond sales to stay in place.

It calculates that ⁠private investors will have to absorb a

record high ‍234 billion euros ($274.81 ​billion) in net supply

this year when adjusted for European Central Bank activity.

Germany plans to issue a new 20-year bond, citing Dutch

pension reform as one reason why the long-dated bond segment is

attractive.

Dutch occupational ‍pensions, the EU's largest, started

shifting to a new system from January 1 that no longer promises

benefits, allowing the nearly 2-trillion-euro sector to buy

higher risk assets.

A Deutsche Bank survey published last month found investors

expect Bund yields to remain little changed around 2.9% by

end-2026, although 38% of those surveyed expected yields in the

3-3.25% area.

ALL EYES ON GERMANY

How Germany's spending bonanza pans out remains a key focus.

Zurich Insurance chief market strategist Guy Miller said his

base case ​was for ‍fiscal stimulus to boost long-term growth

prospects.

"But there are clearly red flags, and the market is pretty

pessimistic on the pace and scope of spending," he said.

"It's about how the money will be spent ​and they need to

focus on the structural challenges they face, not simply trying

to stimulate short-term consumption."

On the ECB outlook, some analysts see one more rate cut as

more likely than not, while others suspect the next move could

be a rate hike.

Euro zone manufacturing activity shrank further in December,

private surveys released on Friday showed. The HCOB Eurozone

Manufacturing Purchasing Managers' Index PMI, compiled by S&P

Global, fell to 48.8, its lowest in nine months.

Traders expect no change when the ECB meets in February, and

price in a ​roughly 20% chance of a rate increase by year-end.

Rate-hike speculation received a boost last month when ECB

rate-setter Isabel Schnabel said the next move may be an

increase. She later said she expected no hike in the foreseeable

future.

"We've got policy rates on hold, with an outside chance of ‍a

cut in the first quarter should growth disappoint," said Miller.