Euro zone yields edge up, ultra-long end of German curve steepens

By Stefano Rebaudo

Dec 1 (Reuters) - Euro area government bond yields edged up on Monday as investors looked to U.S. Treasuries for direction, while the ultra-long end of the German curve hovered near its steepest levels in over six years. Investors awaited euro area inflation data due on Tuesday, even as individual country figures released last week reinforced economists' expectations that no further European Central Bank rate cuts are likely in the near term.

Germany's 10-year yield, the euro area's benchmark, was up 1.5 basis points (bps) to 2.70%.

The yield gap between 30-year and 10-year yields in German government bonds was at 64.11 bps after hitting 64.40 bps in late November, its highest since May 2019. Germany's parliament on Friday passed the budget for 2026 with over 180 billion euros in new debt, outlining how Berlin will use its financial firepower to revive the anaemic economy. Benchmark 10-year U.S. Treasuries yields were up 2.5 bps at 4.04% after rising on Friday amid low volumes after the U.S. Thanksgiving holiday.

The yield spread between U.S. and German 10-year borrowing costs was at 133.50 bps after hitting 131.96 bps last week, its lowest level since April 7.

U.S. borrowing costs remain in the driving seat, while euro area volatility is expected to stay muted as the ECB is seen holding rates well into 2027.

Germany's 2-year yield, more sensitive to expectations for ECB policy rate outlook, rose one bp to 2.04%. It hit 2.051% in mid November, its highest level since March 28.

The yield gap between Italian and German bonds -- a market indicator of the extra yield investors require to hold Italian debt instead of safe-haven Bunds -- hit a fresh 15-year low at 68.80 bps. (Reporting by Stefano Rebaudo; Editing by Toby Chopra)