Euro zone yields edged down ahead of central banks, US data

Euro zone government bond yields edged down on Monday, reversing an early rise, ahead of major central bank policy meetings and crucial data from the United States later this week.

The US Federal Reserve's Federal Open Market Committee (FOMC) ends its two-day meeting on interest rates on Wednesday, while the European Central Bank (ECB) and the Bank of England (BoE) will announce their decisions on Thursday.

"We see limited downside room for euro zone bond yields considering market expectations for future rate hikes," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

"But economic data remain the primary driver and can quickly change the backdrop," he said, adding volatility would stay low before Tuesday's US inflation data.

Germany's 10-year government bond yield DE10YT=RR fell 2 basis points (bps) to 1.90%, after hitting its highest since Nov. 30 at 1.95%.

"We feel European market rates have come down too far, too fast," ING analysts said in a research note.

US consumer price (CPI) data for November might provide further indications about the Federal Reserve's next moves.

"Another sizable drop in headline inflation should add to market expectations that the likely 50bp hike at Wednesday's FOMC meeting is taking the Fed close to the finish line," Michael Leister, head of rates strategy at Commerzbank, said.

However, a strong CPI print should reinforce the idea that there is still a long way to go in terms of monetary tightening, as the start of the year could bring renewed price and wage pressures in specific sectors.

Italy's 10-year government bond yield IT10YT=RR fell 3 bps to 3.79%, after hitting its highest since Nov. 30 at 3.845% earlier in the session.

The spread between Italian and German 10-year bond yields DE10IT10=RR was at 188 bps.

Markets are pricing in a 50 bps rate hike from the ECB and the BoE.

"In the context of a meeting-by-meeting approach, we are unconvinced that the magnitude of the (ECB) rate hike to be decided by the governing council carries much information for the subsequent path of rates," Citi analysts said.

The ECB is expected to offer some guidance on how it will run down the bonds held on its balance sheet in what is known as quantitative tightening (QT) while announcing the start date and volumes at a later stage.

"There is an outside chance of a 75bp hike for both (ECB and BoE), but, in the case of the ECB, any hawkish bend could manifest itself through an earlier QT push," ING analysts added.