German Bunds steady in choppy trading as Treasuries rally

(Updates with closing European trading)

By Greta Rosen Fondahn and Amanda Cooper

Jan 16 (Reuters) - Benchmark German bond yields steadied on Thursday in choppy trading, drawing some support from a modest rally in the Treasury market following softer U.S. consumer spending data.

Federal Reserve Governor Christopher Waller said he believed the central bank could deliver three or four rate cuts this year if the data supported that, which helped Treasury yields fall as prices rose.

So far this week, the euro zone market has taken most of its cues from U.S. Treasuries, which have got a boost from evidence of cooling inflation that could give the Fed more room to cut interest rates this year.

Traders expect the European Central Bank to deliver roughly a percentage point in cuts this year and accounts of its December meeting released on Thursday show policymakers believe any easing needs to be cautious and gradual.

Germany's 10-year bond yield, the benchmark for the euro zone bloc, ended the day almost unchanged at 2.523%, having fallen by 9 bps on Wednesday, its biggest daily fall since mid-June. Yields rose by as much as 4.6 bps to a session high of 2.57% on Thursday.

Bond markets got relief from what has been an otherwise relentless selloff in January from U.S. December consumer price index data on Wednesday.

The numbers showed a softening underlying inflation in the U.S., which sparked a sharp drop in elevated global bond yields on Wednesday.

However, while inflation has subsided in a number of regions, it has been persistent, while in Europe in particular, growth has struggled.

"Bond yields have risen sharply since the start of the year and we think there is more upside room despite the post U.S. CPI recovery," strategists at RBC said.

"In particular, ECB terminal rates still appear priced too low for us. We are short Bunds and hold on to those positions," they said.

SERVICES INFLATION

Italian 10-year yields fell 3 bps to 3.655%, leaving their premium to German Bund yields 3.6 bps narrower at 112.7 bps.

Germany's two-year bond yield, which is more sensitive to ECB rate expectations, fell 2 bps to 2.231%.

Money markets price in nearly 100 bps in rate cuts from the ECB this year. This compares with about 43 bps priced from the Federal Reserve, reflecting the bloc's much weaker economy.

Germany's economy contracted for the second consecutive year in 2024, data showed on Wednesday. GDP in Europe's biggest economy shrank by 0.2% over the full year.

But sticky services inflation and tariff woes could complicate the rate cut path for the ECB, which has prompted traders to trim their bets for cuts by about 20 bps since the ECB's December meeting.

Data on Thursday indicated that more German companies want to raise prices. The economic institute Ifo said that its price expectations index in Germany rose to its highest level since April 2023 in December, with all economic sectors contributing to the increase.

French Prime Minister Francois Bayrou will face a no-confidence vote on Thursday.

While Bayrou looks likely to ride out the motion, the long-term survival prospects of his minority government have shrunk as he fights to keep the Socialist Party from backing the vote.

French 10-year yields closed down 1 bp at 3.339%, at an 81.5-bp premium to Bunds. (Reporting by Greta Rosen Fondahn Editing by Bernadette Baum and Alison Williams)