(Updates throughout; adds Fed news in paragraph 3)
Sept 4 (Reuters) – Euro zone government bond yields fell on Thursday, after a surge earlier this week, as weak U.S. data and remarks from Federal Reserve officials reinforced bets that the central bank will cut interest rates in September. However, investors remained concerned about rising public debt and increased bond supply in the euro area, with France’s government facing a likely collapse next week over a contested budget vote, while Germany is ramping up fiscal spending.
Several Fed officials who spoke on Wednesday pointed to rate cuts ahead, while weak U.S. labour market data has also bolstered expectations the Fed will cut rates at its September 16-17 meeting. Germany’s 10-year bond yield, the benchmark for the euro zone bloc, dropped 1.5 basis points (bps) to 2.72%.
The 30-year German bond yield fell 1.3 bps to 3.34%. It hit 3.434% on Wednesday, the highest in over 14 years.
Ultra-long-dated euro zone government bonds came under selling pressure earlier this week, with yields hitting multi-year highs, as investors grew increasingly concerned about rising debt levels across the bloc.
Markets expect Germany’s investment plans, along with likely increases in defence spending across euro area countries, to push up debt.
“Euro area government bonds are probably not out of the woods as the underlying fiscal challenges and funding implications still loom large,” said Hauke Siemssen, rate strategist at Commerzbank.
France’s 30-year yield was down 4.3 bps at 4.40%. It hit 4.523% on Tuesday, the highest since June 2009. The yield gap between 10-year French government bonds and safe-haven German Bunds — a market gauge of the risk premium investors demand to hold French debt — widened to 80 bps after reaching 82 bps last week. French Finance Minister Eric Lombard said the government would have to compromise on plans to cut the budget deficit if Prime Minister Francois Bayrou is toppled in a confidence vote on September 8, the Financial Times reported on Wednesday.
Analysts noted that, despite expectations for a higher risk premium on ultra-long borrowing costs, demand for longer-dated bonds remained quite robust.
Italy’s Treasury said on Tuesday it raised 5 billion euros through a new 30-year BTP, after attracting around 107 billion euros in total orders.
Italy’s 30-year yield fell 3.4 bps to 4.58%.
(Reporting by Stefano Rebaudo, additional reporting by Joice Alves; Editing by Ros Russell and Richard Chang)
