Euro area yields jump, markets price out an ECB rate cut in 2026

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Money markets now see zero chance of an ECB rate cut in 2026

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ECB's Schnabel says a hike is more likely than a cut

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Stronger euro zone data challenges expectations for policy easing

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Weakness in Japanese bond markets adds pressure on euro area long-dated debt

(Recasts lede, adds quotes paragraphs 3-4)

By Samuel Indyk and Stefano Rebaudo

LONDON, Dec 8 (Reuters) - Euro zone borrowing costs jumped on Monday as investors scaled back bets on European Central Bank rate cuts after strong economic data and comments from policymaker Isabel Schnabel, who said the next move could be an interest rate hike, though not soon.

Germany's 30-year government bond yield hit its highest since summer 2011 as long-dated debt came under global pressure on worries over rising fiscal spending and heavier bond supply.

"Schnabel's hawkish statement was likely the trigger of the selloff in euro area government bonds this morning, while deeper problems are also at play given the rising issuance prospects across European countries," said Hauke Siemssen, rate strategist at Commerzbank.

"Some investors were also cautious before the Fed policy meeting which is expected to deliver a hawkish cut," he added.

Investors expect a 25-bp rate cut by the U.S. central bank but they would focus on any suggestions about the rate outlook as traders are currently pricing three additional rate cuts by the end of 2026.

Meanwhile, markets have priced out an ECB rate cut in 2026, with traders now seeing zero chance of a move by July compared with about 15% late on Friday. Germany's 30-year yield rose to 3.478%, after rising more than 10 basis points last week, its biggest weekly jump since August. Bond yields move inversely with prices.

Germany's 10-year yield, the benchmark for the euro zone, rose 6.5 bps to 2.876%, its highest since March.

FISCAL CONCERNS REMAIN

The longer-dated part of the euro zone curve has sold off in the last week as weakness in the Japanese bond market has spilled over into the bloc, pushing the 10-year yield above 2.8% for the first time in almost nine months.

"If you compare the euro, yen and dollar curves, it's all been very correlated despite the stories being quite different," Anders Svendsen, chief analyst at Nordea, said.

"Cross-market investors are keeping these curves more or less in tandem."

Japanese bond yields have risen to multi-year peaks on expectations that the Bank of Japan will hike rates when it meets next week and as new Prime Minister Sanae Takaichi has vowed to spend big to grow the economy. The situation remains delicate because of Japan's heavy debt burden. Its debt-to-GDP ratio is by far the highest of any developed country.

Europe also has its own fiscal pressures. France is struggling to pass a budget for 2026, although lawmakers in the lower house approved the taxation part of next year's social security financing on Friday, which saw French bonds outperform.

"Further performance potential could be in store if the full social security bill gets passed on Tuesday and on the back of (Prime Minister S?bastien) Lecornu's latest increase of the growth forecast to 0.8% for this year," Commerzbank's Siemssen argued.

France's 10-year yield was up 3 bps at 3.562%, with the gap between French and German 10-year yields little changed at 73 bps.

STRONG DATA

A flurry of recent strong data has weighed both on bonds and any expectations of more ECB rate cuts in 2026.

German industrial output rose by more than expected in October. Annual consumer prices rose by more than expected and business activity rose to a 2-1/2 year high, data showed last week.

"Our base case for the ECB is no change till end 2026," said Jefferies economist Mohit Kumar. "But we believe a rate cut to be more likely than a hike."

Schnabel, who is typically one of the more hawkish policymakers on the ECB, also said she would "stand ready" to become the ECB's president if asked.

Germany's two-year yield, which is sensitive to changes in interest rate expectations, was up 2.7 bps at 2.126%. (Reporting by Samuel Indyk and Stefano Rebaudo; editing by Amanda Cooper, Peter Graff, William Maclean)