LONDON: German government bonds were range-bound on Friday as investors looked ahead to euro zone inflation to gauge the central bank's next move, after a surprise fall in German retail sales clouded the economic picture.
Spanish bonds rose after Standard & Poor's revised its outlook on Spain to stable from negative, rewarding it for its efforts to reform public finances.
The agency stripped the Netherlands of its triple-A rating but Dutch bonds were unfazed.
An unexpected fall in inflation in October prompted the European Central Bank to deliver a rate cut this month.
Against this backdrop, investors are looking at the November numbers to see if they reinforce a recent message from ECB officials that more monetary easing could be in store.
Euro zone flash inflation estimates for November are out at 1000 GMT. After higher-than-expected German consumer prices data on Thursday, analysts estimate it could come above economists' expectations for a 0.8 percent rise.
"Market participants probably have learned with the German number yesterday that inflation is bouncing back a bit this month, so no deja-vu from last month," said Rainer Guntermann, strategist at Commerzbank.
"It takes a bit of the steam out of this disinflation debate. Of course, the disinflation debate won't go away completely, but for the time being the market is more relaxed that the ECB can comfortably afford to stay put next week."
German Bund futures were 2 ticks lower at 141.64, pushing 10-year yields to 1.70 percent.
The inflation data comes before next week's ECB monetary policy meeting, when its latest staff projections will be published.
"The ECB will have to be dovish next time because the staff forecast will be so low, especially in terms of the outlook for inflation," one trader said.
German retail sales fell 0.8 percent in October, the second straight monthly drop. Ten-year Dutch yields were little changed at 2.04 percent, showing little reaction to S&P's decision to cut the Netherlands to "AA+", removing one of the euro zone's few remaining triple-A credit ratings.
The rating agency also affirmed Spain's BBB- rating.
S&P is the second of the three main credit ratings agencies to lift its outlook for the country in less than a month after Fitch also switched to stable from negative in early November.
Ten-year Spanish yields were 2.6 basis points lower at 4.13 percent, while the Italian equivalent was little changed at 4.04 percent.
Trade has also been quiet this week partly due to a US Thanksgiving holiday on Thursday.
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