Euro zone yields edge up before US data, Italian-German spread hits new 16-year low

By Stefano Rebaudo

Dec 4 (Reuters) - Euro zone government bond yields edged higher on Thursday, tracking U.S. Treasuries, as investors focused on the Federal Reserve's policy outlook ahead of key U.S. jobs data later in the day.

Germany's 10-year yields, the euro area's benchmark, were up 1.5 basis points (bps) to 2.76%.

The yield gap between Italian 10-year government bonds and safe-haven Bunds -- a market gauge of the risk premium investors demand for holding the Italian bonds (BTPs) -- hit a new 16-year low at 67 bps and was last at 69 bps.

Economic strength and fiscal discipline in the so-called EU peripheral countries, combined with faltering growth and increasing bond supply in Germany, have tightened yield spreads versus Bunds.

"Little or no idiosyncratic risks, bid for carry environment and positive risk sentiment should continue to support Italian spreads," said Mohit Kumar, an economist at Jefferies, flagging a target of 60 bps.

"We remain positive on Italy relative to Germany and France," he added.

Idiosyncratic risks include possible domestic political instability, fiscal policy concerns, or banking sector issues that could affect Italian government bonds separately from wider euro zone trends.

Investors are also keeping their eyes on Ukraine peace talks, as a deal could ease inflation pressures and support growth, potentially shaping the European Central Bank's policy path.

But markets remain cautious about betting on a comprehensive and credible agreement being reached soon. Russian President Vladimir Putin said on Thursday that his meeting with U.S. envoys had been "very useful" and that it had been based on the proposals discussed with President Donald Trump in Alaska. Germany's 10-year yield rose 6 basis points on Monday, tracking moves in U.S. Treasuries, after edging higher earlier in the session before U.S. markets opened. Record-high yields on 30-year Japanese bonds helped support demand at an auction of the debt on Thursday at a time when the government plans massive debt-fuelled stimulus.

U.S. borrowing costs remain in the driving seat, as the ECB is seen holding rates well into 2027. Benchmark 10-year U.S. Treasury yields were up 2.5 bps at 4.08% after falling 3 bps on Wednesday as data showed a surprise decrease in private sector payrolls in November.

Germany's 2-year yields, more sensitive to expectations for the ECB policy rate outlook, rose 1.5 bps to 2.07%. They hit 2.08% on Monday, their highest level since late March.

(Reporting by Stefano Rebaudo; Editing by Toby Chopra and Jane Merriman)