Euro zone government bond yields edge down before US inflation data

By Stefano Rebaudo

Dec 20 (Reuters) - Euro zone government bond yields edged down on Friday before U.S. inflation data later in the session that could provide further clues about the Federal Reserve's easing path.

Euro area borrowing costs spent the previous session catching up with a jump in U.S. Treasury yields after the yield gap with German Bunds touched the highest in over 5 years.

Germany's 10-year bond yield, the benchmark for the euro zone bloc, was flat at 2.30% on Friday and on track for a third straight weekly rise.

Investors are bracing for "higher for longer" U.S. interest rates after the Fed on Wednesday indicated that further reductions hinge on more progress in lowering stubbornly high inflation.

Money markets priced in 38 bps of U.S. rate cuts by the end of 2025 - which implies a 25 bp move and around a 50% chance of a second cut - from around 50 bps right before the Fed's meeting this week.

They also discounted a European Central Bank deposit facility rate at 1.83% in December 2025, from 1.80% before the Fed.

Germany's 2-year yield, more sensitive to expectations for ECB policy rates, fell 2.5 bps to 2.03%.

The spread between U.S. and German 10-year yields was at 124 bps after hitting 127.5 bps early on Thursday, its highest since 2019.

French politics remained in the spotlight, with investors trying to assess whether a new government can tackle France's fiscal problems.

The yield spread between French government bonds and safe-haven Bunds - a gauge of the risk premium investors demand to hold French debt - was at 80.50 bps. It recently hit 90 bps, its highest in over 12 years.

The French Senate on Wednesday approved a special law designed to prevent any interruption of public services, by rolling over 2024 budget rules.

(Reporting by Stefano Rebaudo, editing by Kirsten Donovan)