Euro zone bond yields edge up on first trading day of new year

By Dhara Ranasinghe

LONDON, Jan 2 (Reuters) - Euro zone government bond yields rose on Friday, with investors looking ahead to a year that will be marked again by hefty new debt sales, the impact of German fiscal stimulus and geopolitical headwinds.

Benchmark 10-year bond yields edged up in early Friday trade, following Wednesday's rise ?in U.S. Treasury yields. European bond markets were closed on Thursday.

Germany's 10-year Bund yield rose 2.5 basis points (bps) to 2.89%. It ?ended 2025 roughly 50 bps higher, the biggest annual increase since the 2022 global inflation ?surge.

While French yields also rose, Italian yields ended little changed and ?UK gilt yields, a ?source of volatility in the past year, fell.

Commerzbank expects upward pressure on borrowing costs from new bonds sales will remain ?in place.

It calculates that private investors will have ?to absorb a record high 234 billion euros ($274.81 billion) in net supply when adjusted for European Central Bank activity this year.

Germany plans to issue a ?new 20-year bond, citing Dutch pension reform as ?one reason ?why the segment is attractive.

Dutch occupational pensions, the EU's largest, started transitioning to a new system from January 1 that no longer promises benefits, allowing the nearly ?2-trillion-euro sector to buy riskier assets.

A Deutsche Bank survey published last month found investors expect 10-year Bund yields to remain unchanged at around 2.9% by end-2026.

How Germany's spending bonanza pans out this year remains a key focus.

Zurich Insurance chief market strategist Guy Miller said his base case was for fiscal stimulus to boost long-term growth prospects.

"But there are clearly red flags, ?and the ?market is pretty pessimistic on the pace and scope of spending," he said.

"It's about how the money will be spent and they need to focus on the ?structural challenges they face, not simply trying to stimulate short-term consumption."

On the ECB outlook, some analysts see one more rate cut as more likely than not, while others suspect the next move could be a rate hike.

Traders expect no change when the ECB next meets on February 5, and price in a roughly 20% chance of a rate increase by year-end.

Rate-hike speculation received a boost last month ?when ECB rate-setter Isabel Schnabel said the next move may be an increase. She later said she expected no hike in the foreseeable future.

"We've got policy rates on hold, with an outside chance of a cut in the first ?quarter should growth disappoint," said Miller.

($1 = 0.8515 euros)

(Reporting by Dhara Ranasinghe; Editing by Susan Fenton)