LONDON: German Bunds fell on Monday, with appetite for the euro zone's benchmark debt fading after strong factory surveys and above forecast inflation data cemented expectations that the ECB will avoid easing policy in December.
Euro zone factory activity accelerated to its fastest pace in over two years, a survey showed on Monday, marking a slight upward revision from a flash estimate.
Data last week showed inflation rising 0.9 percent in November, above the 0.8 percent forecast and up from 0.7 percent in October, but still below the European Central Bank's target of close to 2 percent.
A sharp fall in inflation in October prompted the European Central Bank to cut its refinancing rate to a record low 0.25 percent. With ECB rates close to zero, further easing would only occur if inflation kept falling, analysts said.
Bund futures fell 51 ticks to 141.20, while German 10-year yields rose 4.4 basis points to 1.737 percent, having traded in a 1.65-1.80 percent range last month.
"Any hopes of ECB (easing) are being dampened ... especially with the PMI (Purchasing Managers Index) revised up slightly," said Nick Stamenkovic, a bond strategist at RIA Capital Markets.
The ECB will also release its updated inflation and growth forecasts, which investors will scour for hints on any policy decisions next year.
Traders say that while the market is not positioned for any moves from the ECB this week, expectations that President Mario Draghi would emphasise that he was ready to do more to spur inflation and stimulate the economy if needed were widespread.
"They (the ECB) will continue to say that rates would stay low and could be lowered further," BNP Paribas rate strategist Patrick Jacq said. "Inflation remains below their comfort area so they can't change their rhetoric but (November's inflation data) won't be a trigger for further action."
Caution before the release of the U.S. non-farm payroll report on Friday also weighed on Bunds, RIA's Stamenkovic said.
A strong reading might raise expectations that the Federal Reserve could start trimming its bond-buying stimulus programme later this month, which could lift U.S. and German yields.
While the euro zone manufacturing survey beat expectations, Spain's showed its factory activity contracted for the first time since July.
Spanish 10-year yields rose 4 basis points to 4.16 percent, while equivalent Italian yields rose 3 bps to 4.08 percent.
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