German bond yields set for biggest weekly rise since March, traders eye rate outlook

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German bond yields rise as investors anticipate euro zone rate hike

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ECB not expected to deliver any change in rates

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US rate cuts widen opportunity for euro debt investments, strategists say

By Amanda Cooper

LONDON, Dec 12 (Reuters) - German government bond yields rose on Friday in their largest weekly rise since March, while short-dated yields headed for their largest weekly rise in 14 months, highlighting how investors have started to price in a euro zone rate rise in 2026, in sharp contrast with the United States, where rates look set to fall.

German 10-year Bund yields, which serve as a benchmark for the wider euro zone market, were steady in early trading at 2.8485%, having risen 8 basis points this week to their highest since March on Wednesday. Two-year yields , meanwhile, are heading for a near-15 bp rise this week, the most since October 2024, as traders tilt their positioning towards a rate rise some time next year.

NEXT MOVE A HIKE?

The European Central Bank has reiterated a number of times it is "in a good place", with regard to the outlook for inflation and growth and did not see any immediate need to cut rates again, leading markets to assume borrowing costs would remain largely stable next year.

Comments from influential policymaker Isabel Schnabel earlier in the week suggested that she at least believed the next likely move in rates would be a hike, prompting a flurry of positioning and a rise in yields.

Next week brings delayed U.S. jobs numbers and several key central bank decisions, including the ECB, which is not expected to change monetary policy or signal anything about a possible near-term change.

The Federal Reserve, meanwhile, cut U.S. rates by a quarter point this week, as expected and indicated that rates could fall again next year.

This has cut the discount of two-year Schatz yields, which are more sensitive to rate expectations than others, to two-year Treasury yields to 135.34 basis points, the smallest since May 2023, according to LSEG data.

SPREADS LOOK ATTRACTIVE

Jefferies strategist Mohit Kumar said U.S./German spreads may offer investors an opportunity to exploit the rate differential and said his team were maintaining a long position in short-dated euro debt.

"We also acknowledge that potential volatility for next week. Hence, for now we would hedge the long position in euro front-end with a short position in U.S. long end. The spread between U.S. and euro rates is looking attractive, and we see euro rates outperforming U.S. from these levels," he said.

On Thursday, strategists at UBS said they recommended investors take a long position in Bunds, on the grounds that term premia - a measure of the compensation investors demand to hold long-term government debt - are too high, considering the long-term outlook for German growth and inflation. They price in a target rate of 2.75% and are prepared to close the position to avoid losses at 2.95%, they said.

(Reporting by Amanda Cooper; Editing by Alexandra Hudson)