LONDON: German bond yields were near seven-week highs on Friday, kept up by the US budget deal, which was seen as removing an obstacle to the Federal Reserve cutting its monetary stimulus.
A breakthrough budget deal that avoids a government shutdown in January and blunts automatic spending cuts easily passed in the US House of Representatives on Thursday.
Ten-year yields were at the top end of this week's 1.81-1.86 percent range and other euro zone bonds held broadly steady as investors refrained from big bets before the Fed's widely anticipated Dec. 17-18 meeting.
"It (the deal) is removing one hurdle to tapering by the Fed, but we think the Fed will still not be in a hurry," Elwin de Groot, senior market economist at Rabobank said, adding they stuck to their forecast for a March move.
"Although unemployment has been coming down there is still considerable underemployment in labor markets and also inflation has been trending down rather than up - so that suggests that the Fed still has time to make that decision."
US producer prices later will give insight into another decisive factor for the Fed - inflation.
Ten-year German yields were steady at 1.85 percent, having hit its highest in seven-weeks at 1.89 percent last Friday.
Two-year German yields were also flat at 0.23 percent, not far from three-month highs hit in the previous session at 0.242 percent. Short-dated German yields have risen along with money market rates recently as banks repay long-term funding lent to them by the European Central Bank at the height of the crisis, further squeezing already shallow year-end liquidity.
"Excess liquidity is not high enough any more to keep these rates low in the context of end of year," Piet Lammens, strategist at KBC said. Other euro zone debt was broadly steady.
Ten-year Italian yields were flat at 4.11 percent, as were Spain's. Spanish and Italian debt fell on Thursday after ECB executive board member Peter Praet told the Financial Times the bank could toughen up requirements on sovereign bonds - which have traditionally been treated as risk-free.
Praet is among the ECB officials to speak later and will be watched for any further comments on the topic.
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