German 30-year yields set for weekly rise, shrug off PMI data

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By Stefano Rebaudo

Jan 23 (Reuters) - German ultra-long-dated bond yields looked on track for their sharpest weekly rise in nearly two months on Friday, as traders braced for continued supply pressure and shrugged off mixed purchasing managers' index data.

Economists expect the euro area to ?increase fiscal spending after Germany unveiled landmark investment plans, while geopolitical tensions are also prompting greater defence outlays across ?the single-currency bloc.

Germany's 10-year government bond yield, the euro area's benchmark, rose ?one basis point (bp) at 2.89%.

PMI data provided a mixed ?picture, with business ?activity expanding more slowly than expected in the euro zone, growing at its fastest pace in three months ?in Germany, and contracting in France.

The 30-year ?yield was flat at 3.49%, and set for a weekly rise of 7 bps, the biggest since early December.

Meanwhile, hawkish signals ?from the Bank of Japan on ?Friday lifted short-term ?government bond yields to a three-decade high, while 30-year borrowing costs fell 3 bps to 3.64% after hitting an all-time high at 3.68% earlier ?this week.

"In Europe, we likely won't see sharp moves like we've seen in Japan this week, but the overall direction should also be for steeper curves," said Michiel Tukker, European rate strategist at ING.

The gap between 30-year and 10-year German bond yields was at 60 bps, and set to end the week ?3.5 ?bps higher, the biggest widening since mid-November.

"Net issuance is more manageable at aggregate level, but we continue to monitor where absorption capacity could ?be tested," said Nicolas Jullien, global head of fixed income at Candriam, after arguing that gross issuance expectations are elevated in several core markets.

"We maintain a 10-30 steepener because structural forces, including Dutch pension fund-related dynamics, support a continuation of the steepening trend despite short-term volatility," he added.

German 2-year yields, more sensitive to expectations for policy rates, were 0.5 bps higher ?at 2.12% and on track to end the week roughly unchanged.

Italy's 10-year government bond yields were roughly unchanged at 3.51%. The gap versus Bunds was at 60 bps, after tightening to 53.50 last ?Friday, its lowest level since August 2008.

(Reporting by Stefano Rebaudo; Editing by Joe Bavier)