LONDON, Feb 26 (Reuters) - European yields rose on Monday, though Italy's 10-year yield touched its lowest in three weeks in early trading, at the start of a busy week with U.S. and European inflation data both due.
Italy's 10-year BTP yield dipped to 3.78% in early trading on Monday, its lowest since Feb. 5 after a more than 10 bps fall on Friday. It was last trading around 3.88%, up 6.5 bps on the day.
Germany's 10-year yield, which dropped 7 bps on Friday, and managed just its second weekly fall of 2024, increased 6 bps on Monday to 2.42%.
That Friday drop, which was seen across European government bonds, came after European Central Bank (ECB) President Christine Lagarde said fourth-quarter wage numbers were "obviously encouraging" in the ECB's efforts to bring down inflation.
Government bond markets are very much driven at present by changing expectations of when central banks will begin cutting interest rates. Yields climbed steadily at the start of this year as investors pushed back expectations of significant rate cuts early in 2024, but have since been more rangebound.
Markets are currently nearly fully pricing a 25 bps ECB rate cut at its June meeting, though they no longer see a cut in April as likely, as they had done earlier in the year.
The gap between Italy and Germany's 10-year yields - often used as a gauge of willingness to invest in Europe's more indebted periphery - reached 140.3 bps in early trading, its tightest since March 2022. It was last at 144 bps.
"Investors are happy to take some additional risk in sovereigns as well as corporate bonds," said Althea Spinozzi head of fixed income strategy at Saxo Bank, adding this could also be seen in the stock market, where many indices around the world are at record highs.
She said she was also watching the outcome of this week's issuance of an Italian bond reserved for retail investors - a BTP Valore bond. This is the third such issuance and Italy attracted more than 18 billion euros ($19.53 billion) in June for its first issue, a record for Italian retail bonds.
INFLATION DATA
The big scheduled data releases for European markets this week are February flash inflation data due in France and Germany on Thursday, with the euro zone on Friday.
The Federal Reserve's favoured measure of inflation, the personal consumption expenditures (PCE) price index for January, is due on Thursday and analysts are expecting it to tick higher.
Both sets of inflation data will be important for markets' assessment of how soon central banks will cut interest rates. European bond markets are currently highly sensitive to U.S. rate expectations as well as European.
"I'm wary of U.S. PCE, you don't want core inflation to be over 0.4% month-on-month," said Kenneth Broux, senior strategist FX and rates at Societe Generale.
He said month-end rebalancing could also affect markets this week which could be supportive of lower yields.
Bond investors will rebalance their portfolios to reflect the duration of the bonds that have been issued, while those that invest a fixed proportion to stocks and bonds will need to reshuffle after stock markets' strong gains this month.
Shorter dated bond yields also edged up. Germany's two year yield rose 5 bps to 2.92% and Italy's gained a similar amount to 3.45%. ($1 = 0.9217 euros) (Reporting by Alun John; Editing by Christian Schmollinger, Sharon Singleton, William Maclean)
