Euro zone yields rise with focus on US Treasuries, economic data

By Stefano Rebaudo

Nov 18 (Reuters) - Euro zone government borrowing costs rose on Monday as U.S. Treasury yields hovered around multi-month highs and markets waited for economic data which could adjust expectations for the European Central Bank's policy rates.

Euro area negotiated wage figures are due on Wednesday and regional purchasing manager surveys (PMI) on Friday.

Analysts noted that the ECB's reaction function had turned towards growth, which could drive the inflation rate below target. Weak PMI figures could lead investors to price in more interest rate cuts, including 50 basis points (bps) in December.

Markets were pricing in an ECB deposit facility rate of 1.94% in July from 1.87% late on Friday while fully discounting a 25 bp cut in December and a 20% chance of a 50 bp move.

"Right now we are seeing some volatility, with bond prices still in the recent range," said Massimilano Maxia, senior fixed income specialist at Allianz Global Investors.

"We don't expect things to change much until we have more clarity about the new U.S. administration's policy," he added.

Tariffs promised by U.S. President-elect Donald Trump would upend international trade but may ultimately have a "minor impact" on inflation, ECB policymaker Joachim Nagel said.

Germany's 2-year bond yield, more sensitive to ECB policy expectations, rose 5 bps to 2.17%, having hit its lowest since Oct. 24 on Friday at 2.091%.

Oil prices rose on Monday stoking some inflation fears after President Joe Biden's administration allowed Ukraine to use U.S.-made weapons to strike deep into Russia.

Investors expect Trump's policies, which also include tax cuts, to boost inflation and interest rates, with the Republican Party achieving control of both the House of Representatives and the Senate.

"The confirmation of a Trump sweep, after the House was called for the Republicans on Wednesday, was already baked into market pricing," said Jamie Searle, rate strategist at Citi, adding the bank's base case is for U.S. yields to settle over the near-term.

Germany's 10-year government bond yield, the benchmark for the euro area, was up 3 bps at 2.38%, while the Italian equivalent, the benchmark for the euro area periphery, rose 5 bps to 3.6%.

That left the spread between Italian and German 10-year yields - a gauge of the premium investors demand to hold Italy's debt - at 121.5 bps after it narrowed to 116.80 on Friday, the tightest since Oct. 21.

The gap between French and German 10-year yields was 73 bps, widening from 70.9 bps on Friday, its tightest since Oct. 31. The spread had expanded after this summer's French elections as investors worried that a fragmented parliament would make it harder to pass the reforms necessary to curb widening budget deficits.

The Paris prosecutor requested on Wednesday a five-year prison sentence and a five-year ban from public office for far-right leader Marine Le Pen, casting doubt on her chances of running in the 2027 presidential election. (Reporting by Stefano Rebaudo, editing by Kirsten Donovan)