Euro zone yields dip before central bank decisions, US data

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Citi expects the ECB to downplay undershooting inflation projections

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Investors on hold before US jobs and inflation data, says UBS

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German Federal Finance Agency auction calendar in focus

(Updates for European afternoon trading)

By Stefano Rebaudo

Dec 15 (Reuters) - Euro zone government bond yields were lower on Monday, ahead of a week packed with central bank policy meetings and Tuesday's U.S. jobs data, which could influence the Federal Reserve's policy outlook.

The European Central Bank and the Bank of England will hold their meetings on Thursday, while the Bank of Japan will announce its rate decision on Friday.

Germany's 10-year yield, the euro area benchmark, was down 2.5 basis points (bps) at 2.837%. It hit 2.894% last week, the highest level since mid-March.

According to Citi, Thursday's ECB meeting may offer "a hawkish hold by downplaying undershooting inflation projections" despite the tightening in long-term financing conditions.

MORE HAWKISH POLICY PATH AHEAD FOR ECB?

Euro zone industrial output growth accelerated in October, bolstering views that the bloc is picking up momentum as trade uncertainty is dissipating.

"The new (ECB) forecasts will now include 2028 and are expected to show that growth is above potential, closer to 1.4% and that inflation is at 2%," said Kevin Thozet, a member of the investment committee at Carmignac.

"Such projections send a dual message. First, that the region is moving in the right direction. Second, that investors should anticipate a more hawkish policy path ahead," he added.

Traders have priced out any further easing from the ECB, while assigning around a 20% probability of a quarter-point rate hike by December 2026 and an almost 50% chance by March 2027.

The ECB deposit rate is currently at 2%.

Benchmark 10-year U.S. Treasury yield fell 4 bps to 4.157% after rising 5.5 bps on Friday as investors assessed commentary from a flurry of Fed speakers and a positive outlook on the economy.

"Several clients told us that they plan to wait for December data on jobs and inflation before re-engaging with front-end trades," said Reinout De Bock, strategist at UBS.

The Deutsche Finanzagentur (DFA) issuance calendar to be released on Thursday will also be in focus.

Commerzbank expects total Bund issuance to reach around 350 billion euros ($411.85 billion) next year, up from 291 billion euros this year.

German 30-year yields were down 3 bps at 3.456%. They reached 3.498% on Friday, the highest level since July 2011, as long-dated debt came under pressure on expectations for heavier bond supply and shrinking demand.

Demand for ultra-long debt is set to shrink as Dutch pension funds, a key buyer, will no longer need to hold large amounts of these assets after an industry reform.

The yield on the German 2-year Schatz was down 1 bp at 2.15%.

Italy's 10-year yield fell 3.5 bps to 3.52%.

Yields on France's OATs dropped 3 bps to 3.55% with the gap against Bunds at 70 bps, with the country's 2026 budget bill still under discussion. The gap hit 69.10 bps in early December, its tightest since August 25.

The French Senate approved the 2026 budget bill on Monday, setting the stage for negotiations between both houses of parliament by the end of the week.

Both chambers must agree for the budget to pass without the government resorting to special constitutional powers.

Analysts argued that the path to pass the main budget bill by December looks narrow, raising the risk of renewed negotiations next year. ($1 = 0.8498 euros) (Reporting by Stefano Rebaudo, additional reporting by Samuel Indyk; Editing by Gareth Jones and Susan Fenton)