Euro zone yields nudge lower but underperform US Treasuries

LONDON, Jan 26 (Reuters) - Euro zone bond yields nudged lower on Monday but benchmark German yields dropped less than U.S. ones and struggled to break far from their one-month top hit on Friday, with analysts saying the medium-term path for Bund yields is higher.

Germany's 10-year ?yield, the benchmark for the euro, was down nearly 2 basis points in early trading to ?2.88%. It nudged just above 2.9% on Friday, its highest since late December.

Government ?bond markets globally last week were shaken by ?a combination of turbulence in ?the Japanese market and geopolitical tensions, particularly over Greenland.

The Japanese turbulence sent longer-dated yields higher globally. But ?Goldman Sachs analysts flagged that yields ?on German bonds, normally a global and regional safe haven, had failed to fall on the broader political worries.

"These market moves remind ?the market of a key ?tension in the ?outlook for European rates, between a resilient domestic economy (improving in the case of Germany) and a challenging external and trade environment," they said in ?a note to clients.

"In contrast to April 2025, Bunds have not performed to the same extent ... one reason for this is that any further rise in geopolitical risk would only intensify the urgency for Europe - and Germany in particular - to use fiscal policy in response to these challenges."

More fiscal spending ?would likely ?require more bond issuance, and this greater supply of bonds would send yields higher.

U.S. Treasuries outperformed European bonds on Monday with the 10-year ?Treasury yield over 3 bps lower at 4.21%.

Both shorter-dated euro zone debt, and those of other countries, were largely moving in line with the German benchmark on Monday.

Germany's 2-year yield also dropped nearly 2 bps to 2.11%.

French and Italian 10-year yields each dropped just over 2 bps to 3.46% and 3.49% respectively.

French debt rallied last week ?as the French government rammed through the income part of the 2026 budget and survived votes of no-confidence.

French 10-year yields are now around 3 basis points lower than Italian, having been close ?to 10 bps higher earlier this month. (Reporting by Alun John; Editing by Aidan Lewis)