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Bund yields hold at levels last seen at start of US

shutdown

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US data in focus, but it will take time to assess economy

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Markets consolidate higher-for-longer view on ECB rates

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Euro area spread tightening may be over, says FTI

strategist

By Stefano Rebaudo

Nov 17 (Reuters) - Euro area benchmark Bund yields

dropped on Monday, partially reversing gains from the previous

session, as markets acknowledged it would take time to

accurately gauge the economy while U.S. agencies clear a backlog

of data.

Market participants expect September's U.S. payroll data to

be released later this week.

Germany's 10-year yield fell 0.5 basis points

(bps) to 2.71%, after touching its joint-highest since October 7

at 2.718%.

The euro zone economy will grow faster than earlier expected in

2025, the European Commission forecast on Monday, mainly thanks

to a surge in exports in the first half of the year ahead of

expected tariff increases.

However, Bund yields kept hovering around the levels they were

when the U.S. shutdown began. The Bund yield closed at 2.7134%

on October 1.

KEY RELEASES FOR FED POLICY MAY COME IN DECEMBER

Analysts expect more U.S. economic figures to start coming

in this week, with volatility likely to pick up. However, the

key releases for shaping the Federal Reserve's policy path, such

as the consumer price index, are scheduled for December, they

say.

With European Central Bank policy on hold, the focus is

elsewhere, mainly on expectations for U.S. Federal Reserve

policy.

Money markets have in recent days priced the chance of a 25-bp

rate cut next month at around 50%, according to CME Group

FedWatch Tool. Chances on Monday were 44% from 60% a week ago.

A drumbeat of hawkish remarks from FOMC members, including the

presidents of the Dallas, Cleveland, and Boston Fed banks, has

made investors more cautious about a potential Fed easing move

in December.

MARKETS PRICE IN A 25% CHANCE OF A ECB RATE CUT IN 2026

Remarks from European Central Bank Governing Council members

Gabriel Makhlouf and Olaf Sleijpen supported expectations that

the central bank will remain firmly on hold.

In the euro area, markets priced in a 25% chance of a 25-bp

ECB rate cut by July next year from 45%

early last week. They also indicated an ECB deposit facility

rate at 1.95% in December 2026 from the current 2%.

Germany's two-year yield, which is sensitive to

changes in ECB rate expectations, fell 0.5 bps to 2.03%, after

reaching 2.044%, a new 7-1/2-week high.

Italy's 10-year government bond yield fell 2 bps to

3.45%, after hitting 3.474%, a fresh five-week high. The gap

over safe-haven German Bunds - a key gauge of the extra return

investors demand to hold Italian debt instead of safe-haven

German bonds - was at 73.50 bps, after last week hitting a new

15-year low at 70.68 bps.

"The theme of the year has been European spreads versus

Germany's Bunds," said Michael Browne, global investment

strategist at Franklin Templeton Institute.

He noted that yield gaps hit fresh lows after media reports

questioned whether Chancellor Friedrich Merz's government will

follow through on its 500 billion-euro fiscal boost, amid

uncertainties that have weighed on polling for Germany's

nine-month-old administration.

"Watch this space, but I think spread-betting may be over,"

Browne added.

German Finance Minister Lars Klingbeil is visiting China, with

Berlin under pressure as a record trade gap widens and supply

chains wobble.

Merz said on Monday that Germany could be facing the greatest

challenges since World War Two, citing its diplomatic

relationships with China and the United States.

The yield gap between 10-year French government bonds

and Bunds was at 74 bps after hitting 70.50 bps

last week, its lowest since August. The spread hit 87.96 bps in

early October, the widest since January, driven by investor

concerns over France's fiscal trajectory.