German yields set for biggest weekly rise in two months

German government bond yields were headed for their biggest weekly rise in two months as traders increased bets on European Central Bank rate hikes after hotter-than-expected US inflation data, while a stock rebound curbed safe-haven demand.

Germany's 10-year government bond yields, the euro area benchmark, climbed 4.5 basis points to 3.37% and were set for a 12-bp weekly rise. They hit 3.2075% last Friday, the lowest level since August 26.

Last week's rout in tech stocks had sent investors rushing into safe-haven bonds. Global stocks gave up early gains to trade lower on Friday.


German 2-year yields, more sensitive to expectations for policy rates, were up 0.5 bps at 3.13%, and on track for a 15.5-bp weekly rise.

ECB euro short-term rate (ESTR) forwards implied the deposit rate would climb to 3.25% by late 2027 from the current 2.50%, up from 3% priced in late last week. They also implied a rate of 2.74% by December.

Brent crude was set for a second straight weekly loss as Washington's focus on its blockade of Iran and other economic pressure eased fears of renewed direct conflict. But traders stayed on guard after President Donald Trump said on Thursday the US does not need a deal with Iran.

The yield gap between French OATs and safe-haven German Bunds - a market gauge of the premium investors demand to hold French debt - was on track for its third straight weekly fall.

However, it was last up 7 bps at 150 bps while being set for an 8-bp weekly drop. It reached 177.72 bps on October 22, its highest level since mid-November 2011 at the height of the euro area's sovereign debt crisis.

OATs remained vulnerable ahead of next year's presidential elections with investors still worried about the country's fiscal trajectory.

"There has been little news on the situation in France, but it is worth noting that any hopes of ECB President Christine Lagarde pulling France out of its political deadlock were dampened after the first polls this week showed she would get only 14% of the first-round votes, similar to other centrist candidates," Michiel Tukker, rate strategist at ING, said.

"This would still see election frontrunner Marine Le Pen and left-wing rival Jean-Luc Melenchon advance to the second round, leaving one of the tail-risk scenarios on the table."